July 23 (Bloomberg) -- India's rupee rose by the most in more than a decade and stocks and bonds soared on speculation the government will allow more overseas investment in the financial industry after surviving a confidence vote in parliament.

The currency strengthened 1.6 percent to 42.075 a dollar at 5 p.m. in Mumbai. The Sensitive Index gained 5.9 percent to 14,942.28, the most since March 25 and the biggest fluctuation of global benchmark indexes tracked by Bloomberg News. ICICI Bank Ltd. and HDFC Bank Ltd. led lenders higher.

Prime Minister Manmohan Singh's victory gives him a mandate to raise foreign investment in insurers and lift curbs on voting rights in banks that had been held up by his former communist allies, according to Citigroup Inc. and Goldman Sachs Group Inc. The win extends the tenure of a government that has delivered record economic growth and lifted investment to an all-time high.

``It is going to bring a lot of confidence to local as well as overseas investors,'' said Parthasarthi Mukherjee, treasurer of Axis Bank Ltd., in Mumbai. ``Asset prices will rise as the negative element that was priced in will get reversed; reforms will be re-initiated and that process would be smoother and quicker this time.''

The government will reach out to parties, including those in the opposition, for support on the economic-reform program including a stalled insurance bill, Finance Minister Palaniappan Chidambaram said in Jaipur today. The government has been seeking to raise the foreign investment ceiling for insurers to 49 percent from 26 percent since 2006.

Confidence Vote

Singh's Congress Party-led coalition government had to face a confidence vote to prove it enjoys a majority in parliament after its erstwhile allies, the communists, withdrew their support over a proposed civilian nuclear deal with the U.S.

The rupee has advanced 8.2 percent against the dollar since the Congress Party proposed Manmohan Singh as its candidate for prime minister on May 18, 2004. The currency has gained in 10 of the 17 quarters after Singh took office, and risen in three of the five years through 2008.

The rupee gained the most since Jan. 19, 1998, today to the strongest since May 12. The currency will advance as Singh revamps economic policies after winning the vote, Goldman analysts Tushar Poddar and Pranjul Bhandari said.

Bills to open pension management to overseas investors and remove a 10 percent cap on the voting rights of foreign investors in non-state banks may also be revived.

``Reforms that appear non-controversial include those in pensions, divestments, banking and finance-related amendments'' may be debated in parliament, Citigroup analyst Rohini Malkani wrote in a note to clients. The vote is positive in part because of ``the absence of the Left, which was a stumbling block on the reform front since the government came to power in 2004.''

Stocks Rally

Under Singh, the stock market, Asia's fifth biggest, has jumped almost fivefold and surpassed $1 trillion in value last year.

The Sensitive Index has climbed 19 percent since July 16, its biggest five-day winning run since April 2, 1992, on speculation that Singh's government would serve out its five-year term ending in May.

The banking index tracking 17 lenders gained the most since May 18, 2004, today. State Bank of India, the nation's largest, rose 10 percent to 1,543.30 rupees. ICICI advanced 12 percent to 738.70 rupees. HDFC Bank, the No. 3, added 9.4 percent to 1,204.60 rupees.

The cost of default protection on ICICI Bank and State Bank declined after the vote.

Five-year credit-default swaps on ICICI dropped 20 basis points to 345 and contracts on State Bank fell the same amount to 230, according to JPMorgan Chase & Co. prices. A decrease in the price indicates improving investor perceptions of credit quality.

Nuclear Orders

Nuclear power equipment makers rallied on speculation Singh's victory will increase orders for turbines and generators used in reactors.

Larsen & Toubro Ltd., the country's largest engineering company, climbed 7.8 percent and Bharat Heavy Electricals Ltd., India's biggest power equipment maker, advanced 11 percent, the biggest rise in five months. Areva T&D India Ltd., the local unit of the world's biggest maker of reactors, gained 4.9 percent.

Bharat Heavy Chairman K. Ravi Kumar said in an interview he'll triple investment in plants supplying overseas manufacturers of reactors if the U.S. accord is signed.

Curb Inflation

The victory would also give the Singh administration more time to curb inflation stoked to a 13-year high by surging fuel and food prices before they begin a re-election bid. The central bank has raised borrowing costs to a 6 1/2-year high and asked banks to set aside more funds to curb price increases. Monetary measures will help moderate inflation, Chidambaram said today.

India's 10-year bond yields fell 10 basis points to a three -week low of 9.02 percent. That is the biggest decline since July 17. A basis point is 0.01 percentage point.

Benchmark bond yields touched a seven-year high this month after climbing every year since 2004 as economic growth that averaged almost 9 percent in the past four years, the fastest since independence in 1947, stoked demand and inflation. The central bank has raised benchmark interest rates 11 times since October 2004 to curb accelerating inflation.

``The entire investment atmosphere will turn positive,'' said Jayant Chiney, treasurer at state-owned Bank of India in Mumbai. ``In the immediate future, the contribution of overseas investors into the markets will increase possibly at a faster pace than we've seen. The rupee will benefit from that.''

To contact the reporters on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.

Last Updated: July 23, 2008 09:03 EDT