Analysts estimate that a $10 per barrel rise in crude oil price pushes up the Wholesale Price Index-based inflation by as much as 1.5 percentage points.
The rise in international oil prices widens the country’s current account deficit, making the rupee vulnerable to depreciation and adding further fuel to the inflation fire through imported inflation.
What is new this time around is that RBI has been one of the biggest sellers of bonds. It has sold Rs40,000 crore through open market operations since September and a total of Rs70,000 crore so far in the current fiscal year.
This was the kick in the teeth for the bond market.
Between all these negatives, bond investors are running out of reason to add to their holdings. The abundance in the banking system’s liquidity is doing little to support the market and this surplus is on its way out as well. The surplus is now down to Rs1.5 trillion from as high as Rs4 trillion in the aftermath of demonetization last year. Since the central bank is a big seller of bonds (to sterilize liquidity), why shouldn’t the rest of the market follow?
Data from the Clearing Corporation of India Ltd shows that foreign banks were the biggest sellers and offloaded close to Rs40,000 crore worth of bonds between September and now. Mutual funds sold about Rs10,000 crore during the same period. Others may soon join once credit offtake begins to pick up.
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