Rupee drops 17 paise to 71.25/USD on fiscal slippage concerns

The Indian rupee Friday weakened by 17 paise to close at 71.25 against the US dollar as concerns related to fiscal slippage weighed on the sentiment after the interim budget unveiled some big populist measures ahead of the general elections.

On a weekly-basis, the domestic currency registered a loss of 8 paise. The rupee had registered a marginal gain of 2 paise in the previous week.

At the Interbank Foreign Exchange (forex) market, the rupee opened at 71.08, but during the day it came under selling pressure. The local unit moved in a range of 70.94 to 71.39 and finally finished at 71.25 per dollar, down by 17 paise against its previous close.

On Thursday, the rupee had settled 4 paise higher at 71.08 against the US dollar.

"Indian rupee and bonds fell on the budget announcement of the higher borrowings," V K Sharma, Head PCG and Capital Markets Strategy, HDFC Securities said.

The interim budget pegs fiscal deficit slipping by 10 bps to 3.4 per cent for the current year, owing to an income support scheme for farmers and expects it to stay at the same level in FY20 as well.

Global credit rating agency Moody's said the inability to meet fiscal deficit target for four consecutive years as a big "credit negative" for the sovereign.

"Announcements towards farms, farmers and middle income category are expected to create huge pressure on the fiscal deficit during FY20," Dun & Bradstreet's lead economist Arun Singh said.

The government made a big populist push in his final budget before the Lok Sabha elections, cutting taxes for middle-class voters and giving cash handouts to farmers. This, however, will widen its fiscal deficit targets for the current and next financial year.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.06 per cent to 95.52, ahead of US labour market report.

Forex traders said rising crude prices weighed on the local unit, while, heavy buying in domestic equities restricted the slide in the local unit to some extent.

Brent crude, the global oil benchmark, was trading higher at USD 60.97 per barrel, higher by 0.21 per cent.

Meanwhile, equity benchmark Sensex ended 212.74 points, or 0.59 per cent, higher at 36,469.43, despite the government presenting a populist budget carrying fiscal fragilities.

Similarly, the 50-share NSE Nifty jumped 62.70 points, or 0.58 per cent, to close at 10,893.65.

Foreign funds bought shares worth Rs 1,315.89 crore from the capital markets on a net basis Friday, while domestic institutional investors sold shares worth Rs 5.07 crore, provisional data showed.

The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 71.1102 and for rupee/euro at 81.3425. The reference rate for rupee/British pound was fixed at 93.1681 and for rupee/100 Japanese yen at 65.31.