Mumbai: The rupee fell on speculation investors will pare holdings of local assets after the government said its budget deficit will more than double in the year ending 31 March.
The currency weakened as the country’s budget shortfall may rise as high as 6% of its gross domestic product (GDP), compared with an earlier estimate of 2.5%, as it spends more to counter the deepest economic slump in six years.
The Bombay Stock Exchange’s benchmark index, the Sensex, lost 3.4%.
“India’s fiscal deficit situation is in no way encouraging and that could put pressure on the rupee” to weaken, said Roy Paul, assistant manager of treasury at Federal Bank Ltd in Mumbai.
The rupee declined 0.3% to 48.83 per dollar at the 5pm close in Mumbai.
The currency may trade between 48.50 and 49.25 in the coming days, according to Paul.
The median estimate of 25 strategists and economists surveyed by Bloomberg is for the rupee to weaken to 49 by the end of March.
The government plans additional expenditure of Rs20,000 crore this fiscal to fund the two economic stimulus packages it unveiled in the past two months.
India raised its borrowing target for the current fiscal year by 80% to a record Rs2.61 trillion, according to the government’s interim budget presented on Monday. It plans to raise Rs3.62 trillion by selling bonds in the fiscal year that starts on 1 April.
James McCormack, head of Asia sovereign ratings at Fitch Ratings in Hong Kong, said failure to cut the deficit “could undermine” India’s economic growth prospects and put at risk its ability to continue to attract capital.
The government has said growth in the current fiscal year may slow to 7.1%, the weakest since 2003.
The rupee fell 19% last year as overseas funds pulled out $13.3 billion from the nation’s stock market.
Foreign investors have sold a net $969 million this year.
Offshore contracts indicate traders bet the rupee will trade at 49 to the dollar in a month, compared with expectations for a rate of 48.83 on 13 February.