Prime Minister Manmohan Singh acknowledged that the unfolding crisis in had added to the country's concerns about troubles in the neighbourhood. "Today, there is lack of peace and stability in our neighbouring nations, be it Nepal, Pakistan or Sri. It (the developments) can also affect security situation in our country," he said.
As the government tracked developments in the Himalayan nation, it was also having to fend off the Maoists' charge that it was meddling in Nepal's internal affairs and was, in fact, responsible for ouster of their government. The charge of interference came from Prachanda himself as he blamed "foreign powers" for his resignation.
The outgoing Nepal PM said his party was ready to maintain "cordial relations" with neighbouring countries but would "not accept any intervention". "I will quit government rather than remain in power by bowing down to the foreign elements and reactionary forces," Prachanda said in what was widely interpreted as reference to .
Stung by the charge, foreign minister Pranab Mukherjee firmly said, "What is happening in Nepal is internal to Nepal. We would hope that the broadest possible political consensus would make it possible for Nepal to concentrate on the agreed tasks of Constitution making and of democratic transition."
The foreign minister's comments came against the backdrop of the perception that India had an interest in keeping the Nepal army chief in his job.
While India's discomfort with the way Maoists tried to expand their control over the state is no secret, what is also true is that any sense of relief has been trumped by apprehension of an unstable future for the Himalayan country, particularly at a time when the rest of the region is in turmoil.
It is recognised that Prachanda's resignation puts Nepal on a shaky path yet again, barely three years after a discredited monarchy was ousted from power, and that the peace process would be in jeopardy if the Maoists carry out their threat of taking to the streets again.
Sources said to ensure that Nepal does not slide into chaos again, India will have to engage in a lot of backroom work to get the rag-tag coalition working again.
India, sources said, will also re-engage with the Maoists, because in South Block's assessment, it would be much better to keep the Maoists within the political system than out of it.
The government was bracing for a fresh foreign policy challenge as the resignation of Nepal's Maoist PM Pushpa Kamal Dahal `Prachanda' threw the neighbouring country into a vortex of instability, raising fears of spillover consequences for the country.
But the government is also faced with the risk of having to do with constricted elbow room. Prachanda's criticism showed that India has no clout with his comrades. It is also felt that Prachanda could have regained a lot of the moral ground that he'd lost at the helm of an ineffectual government. Resentment against the Maoists had been rising over the past few months because of their lacklustre governance and their evident interest in capturing state institutions like the army and judiciary. It was becoming clear that the Maoists were less interested in democracy and were heading towards a one-party rule.
But on Monday, Prachanda tried to reclaim the democracy mantle, saying he quit "so as to put an end to this difficult situation and create a positive environment for salvaging democracy, nationalism and the peace process that are currently at risk". Maoists' return to the streets could refurbish their old image as revolutionary heroes, which remains in many parts of Nepal.
The challenge for India in Nepal is to help keep the country from falling into chaos, to nudge the new government to work on writing the Constitution as well as to get some real governance done. All of this while staying out of the public gaze which India has not done recently, and remaining relevant in Nepal.