Indian shares bounced more than 1 percent on Tuesday after they fell the most in six months in the previous session, but the rupee and bonds continued to be dogged by disappointment over Monday's federal budget.
The government set a fiscal deficit target of 6.8 percent of gross domestic product in 2009/10, its highest in 16 years, and Finance Minister Pranab Mukherjee told industrialists he would focus on consolidation path soon after global recovery.
Ratings agency Moody's Investors Service said Monday's budget was consistent with a stable outlook on its sovereign ratings, although it said the commitment to cut a debt overhang was weak. .
The main stock index rose as much as 2.1 percent but trimmed the gains to 1.2 percent by the afternoon, after sliding nearly 6 percent on Monday following disappointment over the lack of reform measures in the budget.
"We foresee limited signs of significant structural reforms being announced in the next one to three quarters as political economy considerations remain at the forefront," said Sailesh Jha, senior regional economist at Barclays Capital.
Apurva Shah, head of research at Prabhudas Liladher, said although the budget did not meet the high expectations of the market, Monday's selling was a little overdone.
"There is a feeling in the market that the fall yesterday was not entirely justified," he said.
Morgan Stanley said in a note on Tuesday it had raised its target for the benchmark stock index to 18,000 by next April from its earlier forecast of 15,000, citing higher earnings potential.
However, the partially convertible rupee gave up early gains and weakened to 48.75 per dollar, its lowest since June 23. It was later trading at 48.57/58, little changed from Monday's close.
Dealers said the strength of the dollar against major currencies weighed on the rupee.
Bond yields climbed to their highest in three months for the second consecutive session after the government announced a large bond supply for this week.
The benchmark 10-year bond yield was trading at 7.06 percent, compared with Monday's 7.03 percent. It hit 7.08 in morning trade, its highest since March 31.
After the market shut on Monday, the central bank said it would auction 150 billion rupees ($3.1 billion) of bonds on Friday, nearly two times the amount indicated in the tentative calendar.
