Rupee,bonds slump ahead of budget on fiscal deficit concerns

MUMBAI (Reuters) - Indian government bonds slumped on Thursday after New Delhi announced a 21 percent hike in capital spending for the railway budget from a year ago and on market talk about a meeting between the finance ministry and analysts and media this weekend.

The most traded 8.27 percent 2020 bond yield rose to 7.97 percent, its highest since Sept. 8, 2015 and up 6 basis points from before the presentation of the railway budget. It closed at 7.9 percent on Wednesday.

The Indian Railways will spend 1.21 trillion rupees ($17.63 billion) towards capital expenditure for the year starting in April 2016, Railways Minister Suresh Prabhu said while presenting the budget, compared with 1 trillion rupees last year.

The increase comes before the government is due to unveil its fiscal budget for the same year on Monday, amid fears New Delhi will widen its 2016/17 fiscal deficit target of 3.5 percent of gross domestic product to afford higher spending that can help boost economic growth.

Meanwhile, several sources told Reuters that the government would meet economists, bankers and some newspaper editors on Saturday, raising market speculation the meeting was intended to manage expectations ahead of Monday.

"This is sending some signal that the fiscal deficit may be higher than even 3.8 percent and the government wants to proactively manage expectations," said an economist with a foreign bank, who was not one of those invited to the meeting.

Meanwhile, the benchmark bond 7.59 percent 2026 yield rose to 7.86 percent from the previous close of 7.83 percent, its highest since Feb. 3.

The Indian rupee also weakened to 68.7725 to the dollar, close to its record low of 68.85 touched in August 2013, and compared with the previous close of 68.5650 as foreign investors worried over the government's fiscal consolidation plan.

($1 = 68.6200 Indian rupees)

(Reporting by Suvashree Dey Choudhury; Editing by Subhranshu Sahu)