Markets tumble on govt deficit concerns

Stockbrokers trade at a brokerage firm in Kolkata in this July 2009 file photo.

MUMBAI (Reuters) – The BSE Sensex fell nearly 6 percent on Monday, its sharpest slide in six months, and the rupee hit its lowest in more than a week as the government boosted spending in the budget to stoke demand, widening the fiscal deficit.

Unveiling his first budget after the Congress-led coalition was re-elected with a stronger mandate in May, Finance Minister Pranab Mukherjee said spending would be ramped up by 36 percent to help lift growth to 7 percent in 2009/10.

Bond yields rose the most in three months as investors grew wary of large market borrowing to bridge the shortfall in funds to spend on rural and infrastructure programmes, which are expected to result in higher supplies and depress appetite.

While the previous government's reform efforts were stymied by its leftist allies, investors had hoped the new administration would be able to push through market friendly measures but the budget belied those expectations.

"Those of the view that the budget would encompass all sorts of exciting structural economic reforms have just had their hopes firmly dashed," said Robert Prior-Wandesforde, senior Asian economist at HSBC.

"Instead this was largely a populist budget focused mainly on the poor with plenty of promises of additional infrastructure spending," he said.

The main stock index ended 5.8 percent lower at 14,043.40, its sharpest fall since Jan. 7 when it slumped 7.2 percent. In intraday trade, it had fallen as much as 6.4 percent.

It was the lowest close since May 26, but the index is still up three-quarters from its 2009 low in early March.

Mukherjee estimated the fiscal deficit at 6.8 percent of gross domestic product, its biggest level in 16 years.

Markets had expected the government to announce a fiscal deficit of up to 6.5 percent, above last year's 6.2 percent.

Bank shares were among the big losers as investors believed the large borrowing plan could hurt treasury income for lenders.

Top lender State Bank of India dropped 8.6 percent to 1,655 rupees, No. 2 ICICI Bank fell 10.1 percent to 678 rupees -- both registering their sharpest fall since March 30.

"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 closed at 48.56/59 per dollar, falling the most in three months, compared with Friday's close of 47.89/91.

It hit 48.57 in intraday trade, its lowest since June 25.

The yield on the benchmark 10-year bond ended at 7.03 percent, after touching 7.04 percent, its highest since April 6. It had ended at 6.83 percent on Friday.

The government set the gross borrowing target for 2009/10 at 4.51 trillion rupees ($93.4 billion) above 3.95 trillion rupees forecast in a Reuters poll last week.

K. Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund, said the market would be watching how the government manages the higher borrowing programme.

"The market will be looking forward to auction announcements, any new calendar schedule and whether this new calendar will be frontloaded or uniform," he said.

The government's economic growth forecast is way above the central bank's projection of about 6 percent, lower than the 6.7 percent expansion in 2008/09.

The growth has slowed significantly from a blistering pace of 9 percent or more in the previous three fiscal years.

(Additional reporting by Mumbai Bureau)

(For full coverage on Budget 2009 click here)