OF the many unintended consequences of empire, none may be more remarkable -- or beneficial to world literature -- than the emergence over the last decade and a half of a new generation of Indians writing in English. Salman Rushdie's ''Midnight's Children'' announced their arrival in 1981. Mr. Rushdie and those who have followed him have enriched English literature by reinventing India in the confident cadences of English prose. Through their writing, they have colonized the literary world of their colonizers.

These new Indian writers have dipped into a deep well of memory and experience far removed from that of their fellow novelists working in English. Of course Americans, Englishmen and Australians have, at different times, set their fictions in distant lands, but Indians write of India without exoticism, their insights undimmed by the dislocations of foreignness. They write in an English that they have both lived and learned, a language of freshness and vigor that is as natural to them as a quarrel on a school playground or a note passed surreptitiously in a classroom.

Just over a year ago, Vikram Chandra joined this generation of authors with his astonishing ''Red Earth and Pouring Rain,'' a first novel narrated by a monkey poet and replete with history and myth, nationalist fervor and yuppie Americana. In this new collection of stories, he leaves behind the warrior horsemen, the European adventurers and the anticolonial rage of the earlier book. In their place, he conjures up an India of glittering Bombay sophisticates, gritty policemen, high finance and low crime, exclusive clubs and arty parties -- and nowhere more delightfully than in ''Shakti,'' a divertissement about two feuding Bombay society ladies.

There are just five stories in this collection and they are named for the traditional human pursuits of Vedic lore. The pursuits are the subject of much disputatious Hindu philosophy. But whereas three of these stories bear the names ''Artha'' (wealth), ''Kama'' (desire, pleasure, love) and ''Dharma'' (faith, righteousness), missing is the fourth great Hindu pursuit, ''Moksha'' (salvation). Mr. Chandra replaces it with ''Shakti'' (strength) and ''Shanti'' (peace), as if to suggest that strength and peace are the only salvation available to his characters.

At the core of the book are two novellas of rare narrative strength. In ''Kama,'' a troubled police officer, confronting the mysteries of love and desire, investigates a murder while agonizing over whether to grant his wife the divorce she seeks. The story is soaked in erotic passion, yet looming over it is the desiccated puritanism of the new Hindu right, exemplified by a hard-edged youth who may or may not have killed his libertine father. In ''Artha,'' Mr. Chandra depicts another Bombay subculture, defined by computer companies, tiny overpriced apartments, furtive homosexual passions, successful women entrepreneurs and menacing underworld dons. And he does so with a sureness of touch and a mastery of structure that are, at the story's end, deeply satisfying.

All five stories are narrated by the callow Ranjit Sharma, who hears them from an older man, Subramaniam, in a nondescript bar. Subramaniam, in turn, adopts other narrative voices as he recounts the tales that he has heard. In general, this technique links the stories effectively, but in the last story, ''Shanti,'' the device seems to run away with itself. ''Shanti'' contains a series of stories within a story within the story, some of which are set in smaller type to stand out among the proliferation of narratives. The effect is too much of a good thing, though Mr. Chandra may simply be offering an ironic bow to his own stylistic device.

''Love and Longing in Bombay'' stands out as a considerable accomplishment, one in which the author marries his storytelling prowess to a profound understanding of India's ageless and ever-changing society. In a typical passage, Mr. Chandra writes of a balcony crowded with ''the younger Maruti 1000 kind of stockbrokers, and also a certain hotel-trainee group who always said, 'Hamara group has the most fun, man.' '' A Maruti 1000 is a sleek and shiny Indian automobile beloved by the newly rich, and hamara simply means ''our,'' but the Indianisms remain unapologetically untranslated. They reflect the hybrid discourse of modern India: at ''Rajesh's bhaiyya gym,'' Mr. Chandra writes, ''I remembered Rajesh whirling the huge joris behind his back. . . . What I thought of as a gym was actually an akhara. . . . Guru-ji was sitting crosslegged on the ground and eating from a thali.'' Americans will look in vain for a glossary, but the precise meanings of these words should not matter: they are the right ones for the objects they describe and would be used in India by an Indian speaking English. The beguiling self-confidence of Mr. Chandra's prose is its own vindication.

The august portals of English literature have finally opened wide to Indian writers, and the language will never be the same. It has been stretched into thrilling new shapes and has been obliged to give voice to unfamiliar sounds. But Mr. Chandra's world and its language are now being threatened. The very name ''Bombay'' is redolent of a way of life of an English-speaking minority whose dominance is ending. Today, a new breed of Bombayite -- speaking Marathi, disdaining cosmopolitanism and espousing sectarian discipline and Hindu resurgence -- has come to power, and the city has officially been renamed Mumbai. With ''Love and Longing in Bombay,'' Mr. Chandra is advertising his allegiances. In the face of the Mumbaikars' nativism, his writing -- worldly, eclectic and humane -- reaffirms the ''old'' Bombay.