The rupee hit a record low and posted its biggest per centage fall in 18 years on Tuesday after Lok Sabha's approval of a $20 billion plan to provide cheap grain to the poor renewed doubts about government resolve to control spending ahead of elections due next year.
The alarm over the fiscal deficit eclipsed an announcement by Finance Minister P. Chidambaram that the government had approved infrastructure projects worth 1.83 trillion rupees, a step aimed at reviving economic growth and shoring up investor confidence.
Instead, the rupee plumbed new depths while shares plunged after Chidambaram spoke as his promise that the government will meet its fiscal deficit target failed to turn sentiment.
"I have already said that 4.8 per cent of GDP and the absolute number that was indicated in the budget is a red line. The red line will not be breached," Chidambaram told a news conference. "I think we'll simply have to be patient, be firm, do whatever is required to be done, and the rupee will find its appropriate level."
Traders said the currency market was working in a climate of fear as repeated efforts by authorities to turn the markets around failed to have a holding impact.
The rupee has lost 17 per cent against the dollar so far this year - making it the worst performer by far among Asian emerging market currencies tracked by Reuters - despite frantic attempts by the government and central bank to support it and repeated comments by the finance minister that the rupee is oversold.
The partially convertible rupee slumped to a record low of 66.30 to the dollar, despite central bank intervention to ease the pace of the decline, surpassing its previous all-time low of 65.56 hit last Thursday.
The currency fell 2.9 per cent on the day to close at 66.24/25, its biggest single-day per centage fall since October 1995 according to Thomson Reuters data and its biggest fall ever in absolute terms.
Shares also slumped, sending the benchmark BSE index down more than 3 per cent and benchmark 10-year bond yields up 44 basis points.
Markets have been caught in a downward spiral since May as the prospect for a tapering off in the Federal Reserve's period of cheap money exposes India's vulnerability among emerging markets - marked by a record high current account deficit, a troubling fiscal deficit and the weakest economic growth in a decade.
Yet, despite measures to address these concerns, including a slew of steps to attract dollar inflows, Indian policymakers are struggling to instil confidence.
"It's not out of choice, but out of compulsion that the finance minister is announcing so many things," said G. Chokkalingam, managing director and chief investment officer of Centrum Wealth Management in Mumbai.
"The trinity of the fiscal deficit, slowing growth and an unstable currency is hitting us badly. In addition to these, the government has passed the food security bill which may put fear in the mind of rating agencies."
Worries are growing that Prime Minister Manmohan Singh's coalition government will be tempted into a populist spending splurge ahead of the general elections due by May and so will struggle to meet the fiscal deficit target.
The 1.35 trillion rupees Food Security Bill is a key part of the ruling Congress party's strategy to win re-election, with its focus on selling subsidised wheat and rice to 67 per cent of India's population of 1.2 billion.
Kotak Institutional Equities said there would be "no free lunch", estimating India's subsidy burden would reach 827 billion rupees from the budgeted 606 billion rupees.
"There are substantial challenges in procurement, logistics and identification of beneficiaries," the brokerage said in a note to clients.
The bill also comes at a time when the government is showing signs of having increased spending since the start of the fiscal year in April, reversing an earlier tight grip, while tax revenues could stagnate amidst a slowing economy.
That is raising concerns about a potential ratings downgrade, although Standard & Poor's is the only one of the three major credit agencies to have a negative outlook on India's BBB-minus sovereign credit rating.
Fitch Ratings analyst Art Woo warned on Monday that India was finding it more challenging to meet its fiscal deficit target as revenues slow.
Chidambaram sought to address concerns about the economic slowdown by pledging to kickstart 36 stalled projects in sectors ranging from oil, gas and power to roads and railways.
"The message that we are sending is that the investment cycle has restarted, and we are pushing it. It is gathering pace," he said.
However, analysts say these projects will not take off quickly, while the government has little to show from recent economic reforms.
Its move last year to allow foreign investment in the retail sector has yet to attract a proposal, though its liberalisation of the aviation industry has yielded investment plans from Malaysia's AirAsia and Abu Dhabi's Etihad Airways.
"I don't think these announcements in particular will incrementally have any impact on sentiment until we see visible impact of implementation and execution of these projects," said HDFC Bank chief economist Abheek Barua, referring to the government's drive to energise the infrastructure sector.
Sensex slumps 590 points as food bill raises worries
The BSE Sensex slumped over 3 per cent on Tuesday, giving up nearly all its gains over the previous three sessions, as blue chips including HDFC plunged on worries the passage of a food security bill would worsen the country's fiscal deficit.
The falls were accentuated as the rupee plunged to a record low of 66.075 to the dollar as the 1.35-trillion-rupee bill providing subsidised grains passed by the lower house of parliament on Monday renewed doubts about the government's resolve to control spending ahead of elections due next year.
The slump in both shares and the currency also comes after overseas investors have sold about $810 million worth of shares in the previous seven sessions through Monday, with global sentiment weakening further amid uncertainty about the prospect of military action against the Syrian government.
The weak appetite for risk also eclipsed an announcement by Finance Minister P. Chidambaram that the government had approved infrastructure projects worth 1.83 trillion rupees, a step aimed at reviving economic growth and shoring up investor confidence.
Analysts were sceptical about India's ability to attract funds for infrastructure projects in an economy growing at a decade-low of 5 per cent.
"There is negative sentiment for emerging markets and government has to take very strong steps at ground level which have been missing so far," said Navneet Munot, chief investment officer at SBI Mutual Fund.
The benchmark BSE Sensex slumped 3.18 per cent, or 590.05 points, to close at 17,968.08, ending its three-day gaining streak.
The broader Nifty fell 3.45 per cent, or 189.05 points, to end at 5,287.45, closing below the psychologically important 5,300 level.
Blue-chips led the decliners, with Housing Development Finance Corp Ltd ending down 7.8 per cent, while ITC Ltd lost 3.1 per cent.
NSE bank index slumped 5.4 per cent to mark its lowest close since January 2012 on continued worries over slowing growth and dimming prospects of RBI reversing its liquidity tightening measures any time soon as the rupee continue to make record lows.
HDFC Bank Ltd plunged 8.1 per cent while ICICI Bank Ltd ended 3.4 per cent lower.
IDFC Ltd slumped 16.5 per cent, adding to Monday's 8.7 per cent fall, after the Reserve Bank of India on Friday cut the limit that foreign investors can own in the infrastructure lender to 54 per cent from 74 per cent without giving a reason.
Oil and Natural Gas Corp fell 3.3 per cent, marking a fall of 6.3 per cent in two days after it agreed to buy 10 per cent in a gas field offshore Mozambique from Anadarko Petroleum Corp for $2.64 billion.
However, among stocks that gained, Dr. Reddy's Laboratories Ltd rose 0.8 per cent, clocking a fourth day of gains after the company said on Thursday it had launched a key generic drug which has sales of $194 million in the U.S.