The rupee weakened sharply on Thursday, retreating from a three-week high hit earlier, after the 2013/14 budget increased spending despite keeping fiscal deficit targets in place, while measures to attract foreign flows were seen as limited.
For the fiscal year starting in April, India proposes to raise spending by funding it with higher revenues in a budget aimed at reviving growth.
Although the fiscal deficit target was maintained at 4.8% of gross domestic product, investors had expected a closer check on spending and were disappointed as the government sought to increase taxes on certain individuals and companies.
Those tax proposals hit stocks, and the government also disappointed some investors by not announcing a cut in debt withholding tax.
"The market was expecting a lot from the finance minister. The budget itself is not negative, but given the promises, the market was expecting a lot more," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"I expect 54.45 to be the next key resistance for the USD/INR today," he added.
At 2:30pm (09:00 GMT), the partially convertible rupee was at 54.32/33 per dollar compared to its close of 53.86/87 on Wednesday. The unit dropped as low as 54.3350, its lowest since Feb. 22.
Before the budget was unveiled, the rupee had risen as high as 53.59, its strongest since Feb. 8.
Finance minister P. Chidambaram announced a budget that kept total spending at 16.65 trillion rupees, above some market estimates, while proposing a 10% tax surcharge on wealthier taxpayers and for certain companies above a certain income threshold.
Despite simplifying the investment registration process, Chidambaram also disappointed investors by not cutting the withholding tax on corporate and government bonds.
"The absence of a cut in withholding tax also disappointed. Debt flows would have increased had the government cut the WHT, which would have been positive for rupee as well," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank