Nate Silver appears to concur with my initial reaction:
[E]lecting someone slightly to the left of center is usually a win for the liberal party in a slightly-to-the-right-of-center jurisdiction. (Democrats may have gotten somewhat spoiled by the elections of 2006 and 2008, during which they were winning virtually every competitive seat, but that environment no longer holds.) Although Democrats have every reason to continue to fight for Indiana, the odds in the current environment are that a Republican will prevail in the race to replace Bayh and Democrats will go from having an uncertain vote for their agenda to one who almost never aligns with them.
Honestly, as much as I dislike Evan Bayh, he's better than the wingnut they'll surely elect in November. Until we create a political environment conducive to electing progressive candidates in redder states, we'll have to negotiate with Bayh/Lincoln/Nelson types -- or the Republican alternative, which, naturally, is much worse.
At the same time, maybe running a progressive candidate in Indiana will help to change minds on the ground, even if there's no chance of that candidate winning.
Adding... Chez posted a sharp analysis as well.