Indian shares rose 0.5 percent on Monday but there was little conviction for a recovery as the market shed most of the day's gains with investors bracing for an interest rate rise.
With little sign of inflation easing in the near term from a 13-year-high of 11.6 percent in late June, the Reserve Bank of India is expected to again tighten policy to calm nerves about rising prices, traders said.
Export-focused software companies led the market higher on hopes for strong quarterly earnings, with a weaker rupee seen helping revenue. Bellwether Infosys Technologies, which reports earnings on Friday, rose 2.6 percent to 1,801.20.
The 30-share BSE index closed up 0.54 percent, or 71.99 points, at 13,525.99, stretching gains into a second successive session. Twenty-two components rose.
The benchmark had risen 2.5 percent during trade after the Congress party-led coalition won assurance of support from a regional party on Saturday for a U.S. nuclear deal helped ease concerns about political stability after the government's left allies threatened to withdraw support.
Jigar Shah, head of research at Kim Eng Securities India, said the early rebound was on hopes the government would stay, but on the economic front there was little cheer.
"The negative factors are still there. So volatility will continue," he said, referring to expectation for further monetary tightening by the central bank to contain inflation.
The BSE index, which has lost nearly a fifth in the last five weeks, is down more than a third this year with foreign funds dumping shares worth $6.6 billion.
No. 4 mutual fund UTI Asset Management has decided to defer its planned $480 million share sale because of a subdued market, six sources with direct knowledge of the matter told Reuters.
Refiner Reliance Industries, the heaviest stock in the main index, fell 3.4 percent to 2,028.15 rupees after a newspaper reported the government was considering higher taxes on private sector refiners to pay for high oil prices.
No. 2 mobile operator Reliance Communications reversed gains to close 4.2 percent lower at 419.80 rupees as investors awaited for clarity on its exclusive tie-up talks with South Africa's MTN that ends on Tuesday.
Analysts and media reports have said the deadline could be extended.
In the broader market, gainers led losers by more than two-to-one. Volume was high at 584 million shares, helped by a block deal of 282.9 million shares in Spice Communications.
The 50-share NSE index closed 0.35 percent higher at 4,030.
Elsewhere in the region, Karachi's 100-share index fell 0.7 percent to 11,878.38 and Colombo's All-share index slipped 0.14 percent to 2,401.17.
STOCKS THAT MOVED
Shares in top lender State Bank of India gained 3.9 percent to 1,171.75 rupees and ICICI Bank added 0.5 percent to 603.75 rupees as investors bought bargains after heavy falls in recent weeks.
* Software services providers Wipro gained 2.5 percent to 440 rupees and while Satyam firmed 4.3 percent to 481.95 rupees in anticipation of good quarterly results.
* State-run Oil and Natural Gas Corp rose 1.2 percent to 887.10 rupees. The company has qualified to bid as an operator for Angolan deepwater blocks, which are likely to be offered after elections in the African nation.
* SpiceJet Ltd rose 21.8 percent to 30.45 rupees, extending gains for the fourth straight session, on media reports that founders of the low-cost carrier were close to a stake sale deal with Vijay Mallya-owned rival Kingfisher Airlines.
MAIN TOP THREE BY VOLUME
* Spice Communications on 286 million shares
* Reliance Natural Resources on 26.4 million shares
* IFCI Ltd on 20.6 million shares
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