The Indian rupee tumbled against the U.S. dollar after finance minister Arun Jaitley unveiled the country’s latest budget.
The budget maintained a fiscal deficit target of 4.1% of GDP. Analysts had widely expected that target to be revised up to 4.5%. Moreover, the target for 2016-2017 was lowered to 3% of GDP. Many were disappointed by the budget’s failure to clarify how it would arrive at its goals.
Ahead of the budget, Kunal Kumar Kundu at Societe Generale wrote that markets would not be disappointed if the deficit was higher “as long as there is a clear roadmap toward fiscal consolidation in the near future.”
India’s high fiscal deficit has posed a risk to its credit rating and limits government expenditure and investment. It also risks deterring investors foreign investment.
“All in all, we suspect Mr Jaitley may come to regret adopting his predecessor’s target as his own,” wrote Mark Williams at Capital Economics. “Meeting the target would cause an unwelcome drag on the economy – particularly if asset sales fall short and spending has to be cut — when confidence is only slowly starting to return. But missing it or employing more creative accounting to ensure it is met would do nothing for investor confidence either.”
Narendra Modi came to power in May in the world’s largest democratic election. And pressure is mounting on the new prime minister to help revive the Indian economy.
The rupee tumbled 0.7% against the greenback to 60.2050 per dollar.
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