Hotels had been enjoying strong bookings

The two bomb explosions in India's financial hub Bombay have knocked confidence on the leading stock exchange at a crucial stage in its recovery.

Immediately after the blasts, Indian shares fell by nearly 3%, while the rupee lost 0.15% against the dollar to close at its lowest level for 10 days.

Chief Minister Sushil Kumar Shinde said he believed the attacks were designed to destroy the relative peace and economic rise being enjoyed by the city.

"The blasts have thrown up a challenge to the resilience of this city."

"The explosions were aimed at targeting the economic activity of the city as well as Bombay as a tourist destination," he said.

But analysts warned against letting the explosions, which killed at least 40 people and injured more than 100, set the economic progress back.

Shattering the peace

India is no stranger to major attacks, with a string of uprisings and explosions since independence in 1947.

Bombay, the financial centre, was also hit by a series of bomb blasts in 1993 that killed 317 people and wounded more than 1,000.

But in the past five months since the last major attack in March, on a commuter train in Bombay, Mr Shinde said Mumbai's economy had been improving.

"There is progress in every (sector) of the economy and wherever one goes, one will find that all our five-star hotels are full.

"Large amounts of foreign investment are also coming into our Mumbai.

"(These) explosions are a conspiracy to destroy the peace prevailing here."

Dollar pressure

The immediate reaction was one of shock.

The benchmark index of the Bombay stock exchange, the Sensex, closed down 3% or 119 points at 4,005 - putting an end to the five-day rally which drove prices up 5% last week to their highest level in 29 months.

The slump came at a time when the share market had been expected to rally into a sixth straight week, buoyed by strong foreign investment and expectations of strong economic growth after a good monsoon.

But analysts sought to reassure investors and warn against any further slide.

"Market sentiment has been affected but for now I do not think this will have any impact on the broader economy," said Gul Teckchandani, chief investment officer at Sun F&C.

"It is early days yet to assess the impact and we have to wait and see how this unfurls."