High oil prices, global tensions threat to improvement in Indian CAD: DBS

Markets view the rally in Brent oil prices, triggered by geopolitical tensions, as a threat to the improvement in India's FY20 current account deficit and forecasts for a balance of payment surplus, according to a report.

Downbeat sentiments saw USD-INR exchange rate test past 72 to two-month high, while the benchmark equity indices witnessed mayhem on Monday, said a report by Singapore's banking group DBS.

Along with oil, the Indian currency and equity markets too took a hit on Monday, akin to emerging market peers, after US President Donald Trump warned Iran of major retaliation if Tehran carries out any attack against America to avenge the killing of top military commander Qasem Soleimani and hinted at striking its cultural sites.

Weak global sentiments lifted INR sovereign bond yields on profit-taking bids, according to the report.

The jump in 10Y yield was, however, modest vs past risk-off episodes, likely due to expectations that the central bank (RBI) will be inclined to step-up buy-sell OMOs in the coming weeks, to cap long-term yields, said the report.

10Y yield rose 5bps to 6.56% on Monday but is still >20 bps below December 2019 highs. 2Y yield held steady.

On Tuesday, however, the Pentagon's decision to distance itself from Trump's threats to bomb Iranian cultural sites despite international prohibitions on such attacks helped cool off Brent crude prices by 1.23 per cent to $68.06 per barrel.

Despite the intra-day recovery, persistence of this spurt in oil prices will be watched closely, the report said.

Market participants view the rally in Brent oil prices as "a threat to the improvement in India's FY20 current account deficit and forecasts for a balance of payment surplus," it stated.

The Reserve Bank of India (RBI) has conducted three tranches of buy-sell open market operations (OMOs) in the last fortnight.

Sub-target revenue growth increases the scope of additional borrowings this quarter. This might necessitate 1-2 more tranches of OMOs ahead of February's Budget, the report said.