India’s rupee halted a seven-day rally and bonds declined after a drone attack on Saudi Arabia’s oil facilities sent global crude prices soaring by the most on record.
The currency fell 0.9% to close at 71.5963 per dollar and the benchmark 2029 bond yields rose eight basis points to 6.72%. The S&P BSE Sensex gauge of equities declined 0.7%. India buys more than two-thirds of its oil, mostly from the Middle East, making it one of the most vulnerable to a surge in energy costs.
The threat of greater geopolitical risks comes at an inopportune time for India, where growth has slowed to a six-year low, and may prompt traders to dial down bets on the central bank adding to four rate cuts this year at its October review.
“If crude prices stay up, the Reserve Bank of India may not be able to deliver more than 25 basis points of cuts,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd in Mumbai.
Data released yesterday showed that wholesale prices rose 1.08% on-year in August.
Retail inflation last month stayed within the RBI’s medium-term target for the 13th month.
India’s current-account deficit widens by $10bn to $12bn with every $10 barrel jump in oil costs, according to Barclays Bank Plc in Singapore.
The needs more time to assess the impact of Saudi attacks on its public finances, RBI governor Shaktikanta Das told a local news channel.
Supporting economic growth remains the central bank’s top priority.
The crude spike overshadowed measures Finance Minister Nirmala Sitharaman unveiled over the weekend to revive growth. The third set of steps in four week include a tax refund program for exporters and a funding window for affordable housing to revive stalled projects. Brent soared 10% and crude traded in New York added 9% after the world’s largest oil exporter lost about 5.7mn barrels a day of output following the attack.
It is the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbour.
The shock comes when sentiment remains fragile in India’s $1.9tn market.
While equities appear to have found a floor after suffering the worst three-month period since 2016, as foreigners turned net buyers last week, a series of steps by authorities to revive the economy have failed to spur a sustainable rally.
Global funds have pulled $4.5bn from shares in the current quarter, and a weak rupee typically leads to a vicious cycle of capital outflows.
“Current-account deficit economies, which are oil importers, will fare worst,” said Khoon Goh, the Singapore-based head of Asia research at Australia & New Zealand Banking Group.
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