Nginx gives 404 error for rails app except the root

I have an Ubuntu 12.04 LTS VPS server that serves a static website with Nginx. I would like to set up a rails application that is accesible from the subfolder 'foo'. I use Passenger for serving the rails app

That is how I configured Nginx:

worker_processes  1;

events {
    worker_connections  1024;
}

http {
    passenger_root /home/akarki/.rvm/gems/ruby-1.9.3-p429/gems/passenger-4.0.5;
    passenger_ruby /home/akarki/.rvm/wrappers/ruby-1.9.3-p429/ruby;

    server_names_hash_bucket_size 64;

    include       mime.types;
    default_type  application/octet-stream;

    sendfile        on;

    keepalive_timeout  65;
    gzip  on;
    gzip_disable "MSIE [1-6]\.(?!.*SV1)";
    gzip_types text/plain application/xml text/css text/js text/xml application/x-javascript text/javascript application/json application/xml+rss;
    charset UTF-8;
    error_log /opt/nginx/logs/file.log warn;

    server {
        listen 80;
        server_name www.domain.com;
        return 301 $scheme://domain.com$request_uri;
    }

    server {
        listen       80;
        server_name  domain.com;
        index  index.html index.htm;
        root /srv/www/domain.com;
        passenger_enabled on;
        passenger_base_uri /foo;
        try_files $uri.htm $uri.html $uri/ =404;

        location = / {
            rewrite ^ /de permanent;
        }

        # redirect server error pages to the static page /50x.html
        error_page   500 502 503 504  /50x.html;
        location = /50x.html {
            root   html;
        }
    }
}

The static website works as expected but the only URL of the rails app that is accessible is the root under 'http://domain.com/foo'

Any other url gives a 404 error.

Do you have any suggestion how to fix this?