Rising Brent crude oil prices will put pressure on inflation as India imports a heavy supply of crude oil requirements from the international market from a mix of oil-producing countries.
The yield on benchmark bonds ended higher on Tuesday, after touching 6.2826% during the afternoon trade, as sentiments of traders have weakened as traders remained cautious ahead of the Reserve Bank of India’s monetary policy. Also, Brent crude prices in the international market rose to $82 a barrel, which further weakened sentiments. The 10-year benchmark 6.10%-2031 bond yield ended at 6.2610%, against 6.2478% on the previous trading session.
“The markets were already wary of the probable policy normalisation in the forthcoming MPC and the surge in crude prices added to the concern leading to a rise in G-Sec yields. The benchmark is expected to hover around 6.25% till policy,” said Anand Nevatia, fund manager, Trust Mutual Fund.
The crude oil prices in the international market jumped higher since Monday after the OPEC and allied oil-producing countries stuck to their current output policy even as oil demand increased from countries across the world on easing of Covid-related restrictions due to an increase in vaccinations.
The OPEC+ group has agreed to add only 400,000 barrels per day in November. Rising Brent crude oil prices will put pressure on inflation as India imports a heavy supply of crude oil requirements from the international market from a mix of oil-producing countries. Dealers said that the rise in oil prices increases risk of higher inflation. By closing market hours, Brent crude oil prices were trading at $82.09 a barrel, for the November maturity.
“The next 2 inflation prints are expected to be within the comfort range of RBI, largely driven by base effect and lower food prices, the central bank may revise the inflation forecast downwards with rising crude oil prices as significant risk on the upside,” Nevatia said.
Meanwhile, traders also remained cautious ahead of monetary policy as the market is expecting policy normalisation by the central bank. However, few dealers expect the RBI to keep repo and reverse repo rates unchanged and continue with an accommodative stance.
CARE Ratings has said in a report that the rise in US bond yields following the Federal Reserve monetary policy meeting and the rise in global crude oil prices exerted upward pressure on domestic yields, which offset to an extent the announcement that the central government would stick to the budgeted borrowings for the fiscal as well as bond-buying by the RBI.
“Secondary market operations i.e., GSAP and OMOs, to anchor bond yields will continue but the scale of purchase could be lower,” CARE Ratings said in a report. Market participants expect yields on 10-year benchmark bonds to move in the range of 6.20% and 6.33% ahead of the MPC decision.