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Egypt Crisis Poses ‘New Risk’ to India’s Inflation

Egypt Crisis Impact India Central Bank Actions, Gokarn said
Subir Gokarn, deputy governor of the Reserve Bank of India (RBI). Photographer: Charles Pertwee/Bloomberg

Feb. 7 (Bloomberg) -- Egypt’s political crisis may drive oil and commodity prices higher, Indian central bank Deputy Governor Subir Gokarn said, flagging a “new risk” to inflation that may spur policy makers to boost interest rates.

“There’s obviously a risk that the situation will transmit into higher commodity prices,” Gokarn told reporters in New Delhi today. “So, that intensifies the risk.”

Indian 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 forces the closure of the Suez Canal, Venezuelan Oil Minister Rafael Ramirez said Feb. 4.

“Everybody is bearish on bonds due to the gains 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 bond climbed for a third day, rising one basis point to close at 8.21 percent in Mumbai. The rupee advanced 0.2 percent to 45.48 against the dollar.

Reserve Bank of India Governor Duvvuri Subbarao on Jan. 25 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 may be at 7 percent by March 31, compared with the earlier estimate of 5.5 percent. The gauge rose 8.4 percent in December.

Egypt’s Crisis

“A whole set of events unfolded in the Middle East which are starting to have an impact on oil prices and that is something which we didn’t anticipate at the time of making the policy announcement on Jan. 25,” Gokarn said yesterday in Dabolim, in the western Indian state of Goa. “It is going to have an impact on our thinking, on our actions going forward.”

Protests demanding an end to President Hosni Mubarak’s 30-year rule erupted Jan. 25 in Cairo and have left as many as 300 people dead, according to the United Nations. Concern that 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 percent, to $100.90 a barrel on the London-based ICE Futures Europe exchange today. Prices have climbed 44 percent in the past 12 months.

Suez Canal

About 2.5 percent of world oil output moves through Egypt via the Suez Canal and the Suez-Mediterranean Pipeline, according to Goldman Sachs Group Inc.

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.

India’s Prime Minister Manmohan Singh said Feb. 4 the nation needs to urgently contain prices, that are rising at the fastest pace among major economies in Asia, as inflation poses a “serious threat to the growth momentum.”

Asian economies including India and China led a global recovery last year that’s been restrained by Europe’s sovereign-debt crisis and a U.S. job market where unemployment has stayed above or at 9 percent since May 2009.

“Uncertainty in the Middle East will impose risks on oil and higher prices of oil could lead to inflation,” Joseph Stiglitz, a Nobel Prize-winning economist, said in New Delhi on Feb. 5. “In the short-run, it may make the recovery more difficult.”

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Kartik Goyal in New Delhi on kgoyal@bloomberg.net.

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Stephanie Phang at sphang@bloomberg.net.

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