Mumbai:Indian shares extended losses to 6% on Monday afternoon as a higher fiscal deficit set by the budget disappointed investors.
Sentiment was also weighed down by European shares that fell early to seven-week lows on worries an economic recovery may still be some way off.
Index heavyweight Reliance Industries led the index losers and was trading down 6.5% at Rs1,893.5, followed by ICICI Bank that dropped 9.3% to Rs684.2.
By 2:50pm, the 30-share BSE Index was down 5.99% at 14,020.10 points, with 28 component losing.
The 50-share NSE Index was down 6.05% at 4,156.75 points.
Rupee dropped to its lowest in a week as new growth spending announced by the government fueled investor fears about the growing fiscal deficit, sending bond yields sharply higher.
Bond yields spiked 16 basis points after finance minister Pranab Mukherjee said the fiscal deficit for 2009/10 was expected to rise to 6.8% of gross domestic product from 6.2% in the last fiscal year.
Markets had expected the government to announce a fiscal deficit of up to 6.5% of GDP as it ramped up borrowing to pay for additional spending.
Mukherjee, presenting the first budget after the Congress-led coalition was re-elected with a stronger mandate in May, outlined measures to speed up infrastructure development and proposed to increase spending for farmers and the poor.
“The real concern emerging from the budget is that it has not given confidence as to how the government will go about the fiscal consolidation process, after hiking the fiscal deficit target,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
“While the thrust on agriculture, infrastructure, ecetera augurs well from the long-term growth perspective, the fiscal profligacy is quite obvious in the near term and hence the markets have also reacted negatively.”
The main stock index fell as much as 5.1% after the finance minister ended his speech, after gaining more than 1% in morning trade ahead of the budget.
It later pared losses and was trading down 3.6% at 14,376.40 at 1:00pm.
“The market is bothered by the increased expenditure, especially that for subsidies,” said Nischal Maheshwari, head of research at Edelweiss Securities.
The partially convertible rupee fell to Rs48.50 per dollar, its lowest since 26 June and compared with Friday’s close of Rs47.89/91. It was later trading at Rs48.3.
The yield on the benchmark 10-year bond was at 6.99%, 16 basis points above Friday’s close.
Bonds had priced in expectations the fiscal deficit would widen to between 6.25-6.5% of GDP in the fiscal year ending in March 2010.
The government set the gross borrowing target for 2009/10 at Rs4.51 trillion 93.4 billion) above Rs3.95 trillion forecast in a Reuters poll last week.