The Budget got a thumbs-up from rating agency Moody's but that wasn't enough to soothe nerves in the currency market. The rupee dropped to a low of 55.15 against the dollar, the weakest since January 8, before closing marginally stronger, with exporter and corporate dollar sales aiding the recovery.
The rupee ended the day at 54.86, stronger than the previous close of 54.91, according to Bloomberg data. The currency had closed at Rs 53.87 against the dollar on February 27, a day before the presentation of the Budget. Finance Minister P Chidambaram's comments in an industry chamber meeting about an economic recovery in FY14 also had a positive effect.
But traders said disappointment over the Budget last week was likely to hurt the rupee in the near term, with fundamentals such as a record current account deficit likely to keep the downward pressure. The rupee has lost two per cent since the Budget, on downgrade concerns and rising demand from importers for the greenback.
In a statement earlier in the day, Moody's said the Budget offered a "realistic" plan to meet the country's fiscal deficit target, and should be a credit-positive for its sovereign ratings. A more aggressive fiscal consolidation effort would have been difficult to achieve, as low incomes significantly constrained the government's revenue base and necessitated social expenditures, it said.
The agency said the fiscal consolidation could pave the way for monetary easing, which would revive growth. However, Moody's warned that achieving targets, specially disinvestment, would be challenging.
There were still no indications that gross domestic product growth -" and, hence, tax revenues -" would accelerate to the extent the government expected, it said. The subsidy bill was also likely to overshoot Budget estimates, as it had in the past seven years, Moody's said.
Treasury executives said the outlook for the rupee was still weak. The comfort from strong foreign institutional investors' flows might not be relevant now; equity assets are sharply down in 2013, said J Moses Harding, head, economic and market research, IndusInd Bank.
Year-end dollar demand would also keep the rupee under pressure. "The rupee may touch 56 per dollar sometime this month, due to import payments and balance adjustments of importers," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
Moody's is the only one among the three major credit agencies to have a "stable" outlook on India's ratings. Standard & Poor's and Fitch had cut the outlook to "negative" last year.
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