Prime Minister Manmohan Singh's unexpected easing of foreign ownership caps on airlines and retailers underscored his resolve to win back badly dented investor confidence, sending the shares of companies such as Kingfisher Airlines Ltd and Shoppers Stop Ltd sharply higher.
Infighting in the fragile coalition government led by Singh's Congress party had earlier forced it to shelve the retail and aviation reforms. Coalition allies were anxious that regulation changes in favour of foreign firms such as Wal-Mart Stores Inc would cost them votes.
The so-called big bang reforms are a clear sign that Singh is eager to demonstrate that the government is serious about fixing an economy that has been hard-hit by a global slowdown and political gridlock at home.
Indian retailers such as Pantaloon Retail India Ltd surged as much as 30 percent in Mumbai trading on Monday. Funds-starved Kingfisher jumped 19.9 percent.
But analysts warned against excessive optimism, given that India had previously announced major reforms only to roll them back later. The government had also previously struggled with fine-tuning the details behind its big-policy initiatives.
"Any rollback would be disastrous," said Sudip Bandyopadhyay, CEO of Destimoney Securities Pvt Ltd in Mumbai. "Implementation of the reform measures would be key for markets from here onwards."
India said on Friday it would allow foreign supermarkets to buy up to 51 percent in a local partner, reviving measures it had put on hold in December due to strong political opposition.
The action should benefit debt-laden companies in the country's $450 billion retail market, but comes with stiff provisions, including allowing state governments to make their own decisions on whether to let in foreign supermarket chains.
"FDI is a positive, but it's not the panacea for the sector," Macquarie Capital Securities India said in a note dated on Friday.
"Even well-funded business groups have not been able to grow their retail businesses rapidly. Similarly, despite its global expertise Wal-Mart hasn't been profitable in China for the last 12 years," it said.
Investors bet that Future Group would benefit most from the reform measures. India's biggest retailer runs the Big Bazaar chain of hypermarkets and also has a stake in Pantaloon.
Future has been looking for a foreign partner to help fund expansion and reduce a debt burden of almost 20 billion rupees.
Other companies which are likely to benefit are Shoppers Stop, whose hypermarket chain Hypercity has been seeking a foreign partner. The shares rose 10.4 percent.
Major foreign retailers already have some operations in India. Wal-Mart has a cash-and-carry tie-up with Bharti Retail for wholesale stores, while Tata Group-owned Trent Ltd has a supply chain agreement with Tesco PLC for its Star Bazaar hypermarkets.
Similarly, the government's decision to allow foreign carriers to buy stakes of up to 49 percent in domestic carriers sparked widespread share gains in the sector.
Kingfisher, reeling under a debt load of $1.4 billion, has been looking to raise funds. It said the government's measures would help it "re-engage" with investors.
No foreign airline has so far publicly expressed their interest in Kingfisher.
Investors were upbeat about SpiceJet Ltd , betting that the budget carrier will attract foreign investments given its healthy balance sheet and significant market share.
A SpiceJet spokeswoman told Reuters last week that it was in initial talks with several Gulf carriers for potential investments.
But analysts cautioned against expecting a queue of foreign carriers looking to invest in India despite the aviation sector's growth potential.
Dubai's flagship carrier Emirates said on Monday that it had no plans to buy a stake in any Indian carrier.
India's airline sector is struggling with a big jet fuel bill, high airport charges and steep competition in fares.
JPMorgan recommended investors to "sell into this rally."
"It is too early to assume that foreign airlines will pay a significant premium to invest, given fundamental headwinds," the investment bank wrote in a note dated on Monday.