Egypt's political crisis might drive oil and commodity prices higher, flagging a “new risk” to inflation that might spur policy makers to boost interest rates, Reserve Bank of India (RBI) Deputy Governor Subir Gokarn said.
“There’s obviously a risk the situation will transmit into higher commodity prices,” Gokarn said here on Monday. “So, that intensifies the risk.”
The government bond yields climbed to a three-week high as Asia’s third-largest economy, which meets about three-quarters of its annual energy needs from imports, braces for the impact of higher fuel costs.
Oil prices could more than double if the unrest in Egypt forced the closure of the Suez Canal, Venezuelan Oil Minister Rafael Ramirez had said o February 4.
“Everybody is bearish on bonds due to the gain in prices,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank in Mumbai. “The Egypt issue has also added to the uncertainty on the oil front.” The yield on the benchmark nine-year government bonds climbed for a third day, rising one basis point to close at 8.2 per cent in Mumbai. The rupee advanced 0.2 per cent to 45.5 against the dollar.
On January 25, RBI Governor D Subbarao raised the key repurchase rate for a seventh time in a year and pledged “persistence with the anti-inflationary monetary stance” as he boosted the nation's inflation forecast. Subbarao said India’s benchmark wholesale-price inflation rate might be at seven per cent by March 31, compared to the earlier estimate of 5.5 per cent. The gauge rose 8.4 per cent in December.
Egypt's crisis
“A whole set of events unfolded in the Middle East and they are starting to have an impact on oil prices. That is something we didn't anticipate at the time of making the policy announcement on January 25,” Gokarn said yesterday in Dabolim, Goa. “It is going to have an impact on our thinking, on our actions going forward.”
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Protests demanding an end to President Hosni Mubarak’s 30-year rule erupted on January 25 in Cairo and have left as many as 300 people dead, according to the United Nations.
Concerns that the turmoil in Egypt could force the closure of the Suez Canal, halting crude shipments through the waterway, sent North Sea Brent oil prices above $100 a barrel for the first time since October 2008 last week. Brent crude for March settlement climbed as much as $1.07, or 1.1 per cent, to $100.9 a barrel on the London-based ICE Futures Europe exchange on Monday. Prices have climbed 44 per cent in the past 12 months.
Suez canal
About 2.5 per cent of world oil output moves through Egypt via the Suez canal and the Suez-Mediterranean pipeline, according to Goldman Sachs Group. Egyptian Vice President Omar Suleiman and some members of the opposition yesterday agreed on limited steps to resolve the crisis, even as the government stood firm against the demand from protesters that Mubarak resign.