Key Takeaways
- Indian government bonds may face selling pressure as Brent crude nears $100 per barrel.
- Brent crude has risen 10% this month, stoking inflation fears.
- Indian central bank continues to withdraw liquidity to manage financial stability.
Indian government bonds are expected to see selling pressure in opening deals on Wednesday, reversing some of the previous session’s gains. This shift is attributed to the recent spike in Brent crude prices, which has climbed to nearly $100 per barrel, raising inflation concerns.
The yield on the benchmark 6.94% 2036 bond is anticipated to move between 6.94% and 6.98%, according to a trader at a private bank. The bond closed at 6.9431% in the previous session.
Traders are cautious, noting that the recent positive momentum about the central bank not undertaking stringent liquidity absorption measures has been overshadowed by the spike in oil prices. A trader commented, 'There was some positive momentum getting built up about the central bank not undertaking any stringent liquidity absorption measures, but the spike in oil prices is expected to reverse recent gains.'
Oil prices have surged for the fourth consecutive session in Asian hours, following Iran’s launch of fresh attacks on US military assets in the Gulf. The conflict between Washington and Tehran has spread across the region, with Iran’s Revolutionary Guards claiming to have attacked two US destroyers and a US base in Jordan’s Al Azraq with ballistic missiles.
US Secretary of State Marco Rubio warned Iran that the US would continue to strike Iranian oil tankers in retaliation for attempted attacks on US warships. This escalation has further contributed to the volatility in oil markets.
Brent crude has risen 10% so far this month, posing a significant risk to India’s inflation trajectory and government finances. A sustained rise in oil prices could exacerbate inflationary pressures, impacting the overall economic stability.
In response, India’s central bank has continued with overnight variable-rate reverse repos to withdraw liquidity on Tuesday, instead of undertaking bond sales. The banking system liquidity has surged to a record high due to large diaspora deposit inflows.
Large liquidity surpluses, if sustained, risk raising inflation and boosting financial asset prices. The central bank’s actions are aimed at maintaining financial stability and managing the potential impact of rising oil prices on the economy.
There was some positive momentum getting built up about the central bank not undertaking any stringent liquidity absorption measures, but the spike in oil prices is expected to reverse recent gains.
A trader at a private bank, Trader
