The Indian rupee hit a record low and share prices slumped today.
The falls came after parliament's approval of a $20 billion plan to provide cheap grain to the poor renewed doubts about the government's resolve to control spending ahead of elections due next year.
The alarm over India's fiscal deficit eclipsed an announcement by Finance Minister P Chidambaram that the government had approved infrastructure projects worth 1.83 trillion rupees ($28.38 billion).
This is aimed at reviving economic growth and shoring up investor confidence.
Instead, the rupee plumbed new depths after Chidambaram spoke and his promise that the government will meet its fiscal deficit target also failed to turn sentiment.
The Indian currency has lost over 16% of its value against the dollar so far in 2013 - making it the worst performer by far among Asian emerging market currencies tracked by Reuters.
The falls have come despite frantic attempts by the government and central bank to support it and repeated comments by the finance minister that the rupee is oversold.
The partially convertible rupee slumped to a record low of 66.075 to the dollar, despite central bank intervention to ease the pace of the decline, surpassing its previous all-time low of 65.56 hit last Thursday.
Indian markets have been caught in a downward spiral since May as the prospect for a tapering off in the Federal Reserve's period of cheap money has exposed India's vulnerability among emerging markets - marked by a record high current account deficit, a troubling fiscal deficit and the weakest economic growth in a decade.
Yet, despite measures to address these concerns, including a slew of steps to attract dollar inflows, Indian policymakers are struggling to instill confidence among investors.
Worries are growing that Prime Minister Manmohan Singh's coalition government will be tempted into a populist spending splurge ahead of the general elections due by May and so will struggle to meet the fiscal deficit target.
The 1.35 trillion rupees ($20.94 billion) Food Security Bill is a key part of the ruling Congress party's strategy to win re-election, with its focus on selling subsidised wheat and rice to 67% of India's population of 1.2 billion.
The bill also comes at a time when the government is showing signs of having increased spending since the start of the fiscal year in April, reversing an earlier tight grip, while tax revenues could stagnate amidst a slowing economy.
That is raising concerns about a potential ratings downgrade, although Standard & Poor's is the only one of the three major credit agencies to have a negative outlook on India's BBB-minus sovereign credit rating.
