MUMBAI (Reuters) - The rupee neared a record low on Tuesday and shares slumped nearly 2 percent after the lower house of Parliament approved a nearly $20 billion plan to provide cheap grain to the poor, raising concerns the country's fiscal deficit will blow out even further.
The partially convertible rupee was trading at 65.40/41 per dollar at 1043 IST, not far from its record low of 65.56 hit on August 22 and weaker than its close of 64.30/31 on Monday.
Finance Minister P.Chidambaram said on Tuesday the government would stick to its fiscal deficit target for the year, while announcing cabinet approval of power and infrastructure projects worth 1.83 trillion rupees.
Yet the comments failed to sway investors, with market watchers sceptical about India's ability to attract funds for infrastructure projects in an economy growing at a decade low of 5 percent.
The rupee has already been beaten down around 15 percent so far in 2013 despite frantic attempts by the government and central bank to shore it up.
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Indian stock markets were also hit on Tuesday, raising the prospect of further capital outflows, with the benchmark BSE Sensex falling 1.7 percent and the broader Nifty down 1.9 percent.
Overseas investors have sold about $810 million worth of shares in the previous seven sessions through Monday, adding to pressure on the rupee.
"The Food Security Bill is the key reason for the rupee's fall today. It would open floodgates for (credit) ratings downgrades, if the fiscal deficit is not reined in," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
The government hopes to contain the fiscal deficit to 4.8 percent of gross domestic product for the year ending in March, but fears are growing it will be tempted to launch a flurry of fresh populist spending ahead of elections which are due by May.
The Food Security Bill, budgeted to cost more than 1 trillion rupees, is a key part of the ruling Congress party's strategy to win re-election in polls, with its focus on selling subsidised wheat and rice to 67 percent of its population of 1.2 billion.
The country's record high current account deficit has already made it particularly vulnerable as global investors brace for the end of the Federal Reserve's period of cheap money, and measures taken so far by policymakers have been inadequate to stem the rout.
Kotak Institutional Equities said there would be "no free lunch," estimating India's subsidy burden of the plan would end up reaching 827 billion rupees from the budgeted 606 billion rupees.
"There are substantial challenges in procurement, logistics and identification of beneficiaries," the brokerage said in a note to clients.
Fitch Ratings analyst Art Woo said on Monday it was getting more challenging for India to meet its fiscal deficit target in the current fiscal year ending March 2014 with revenues slowing, in comments made before the lower house of parliament passed the food bill.
Standard & Poor's is the only of the three major credit agencies to have a "negative" outlook on India's "BBB-minus" sovereign credit rating. Any downgrade would put the country in "junk" territory.
The benchmark 10-year bond continued to fall with yields rising 5 basis points to 8.39 percent tracking the rupee's fall.
(Reporting by Swati Bhat; Editing by Rafael Nam)
