Steep upward jump in crude take sheen off gold, bonds

Markets witnessed an intense selloff, Sensex suffered its worst loss in six-months, rupee reached precariously close to 72 against a dollar and gold prices surged a 7-year high after Brent crude crossed the psychological $70 per barrel mark on Monday and potential sanctions on Iraq by the US posed a bigger risk to oil prices in the coming days.

As a spiral effect of rise in crude prices, the interest rate, commonly known as yield, on the 10-year government bonds, which determine loan costs in the economy, went up to 6.57% from 6.50% despite the Reserve Bank of India's efforts to keep them lower for lower borrowing costs of the overall economy.

Brent crude prices have jumped by $6 per barrel after US airstrike killed Iran's top military general on Thursday night. India has taken a greater hit than other emerging market economies due to its excessive dependence on import of crude oil.

India is the globe's third-largest importer of crude oil and, as the dollar demand for crude rises, it puts more pressure on the rupee. The weakness in the rupee impacts the equity market as the investors prefer to sell their rupee-denominated stocks for dollar denominated ones. Consequently, the Benchmark Sensex fell 788 points, its steepest since July 8, 2019, and The 50-share Nifty shed 252 points to end below 12,000.

As equities plunge severely, investors also take refuge in the haven assets – gold and silver – spiking their prices. As a result, gold prices in India hit an all-time high of Rs 41,730 per 10 gram. Silver prices also surged by Rs 1,105 per to Rs 49,430 per kg.

Gold and oil together account for a fourth of India's total import bill. Any sustained rise in prices of the two commodities could mean drawing down on foreign exchange reserves. That is when a balance of payment crisis arises.

India imported $123 billion worth of crude and gold in 2018-19, which was 25% of its total imports. The first fall out of soaring oil prices would be a hefty expenditure cut by the govt and that would choke economic growth further.

Experts said any eventual attack on middle-east oil facilities would spike crude oil prices further. Iraq is India's top oil supplier after Saudi Arabia.

Crude prices were already rallying high after easing of trade tension between the US and China and extension of a production cut by the OPEC countries.

“After US airstrike, price of Brent has the potential to increase and cross the $70/bbl mark in the coming few days, depending on the retaliation planned by the Iran government and the longevity of the feud is continued by both the countries,” a CARE Rating report said.

The first fallout of soaring oil prices will, however, be a hefty cut in government expenditures in the coming days as it tries to keep its deficits under control.