NEW DELHI – The rupiah and sovereign bonds were both battered on Tuesday as a sharp escalation in tensions between Russia and Ukraine sent global crude oil prices soaring, eroding risk appetite investors, the dealers said.

The partially convertible rupee was at 74.8700/$1 at 3:30 p.m. from 74.5050/$1 at the previous close. The Indian currency, which had opened at 74.6820/$1 traveled in a band of 74.7040-74.9890/$1 during the day.

After Russian President Vladimir Putin said his country recognized separatist factions in Ukraine, members of the European Union said Moscow’s moves amounted to an act of war and would result in sanctions.

Since Russia is a huge exporter of crude oil, sanctions imposed on the country would likely lead to disruption of international crude oil supply.

Crude oil futures for March delivery on the New York Mercantile Exchange jumped 4% and were the last to hover around seven-year highs at $94.70 a barrel.

Tighter crude oil prices pose a major upside risk to India’s inflation and put pressure on the trade deficit, given that the country is a massive importer of the commodity.

Dealers were of the view that the rupee would likely head towards the psychologically significant $75/1 mark in the coming days. At this level, the national currency could see some respite in likely selling of dollars by banks on behalf of exporters, noting higher levels of the dollar against the rupee, dealers said.

However, the longer-term view for the rupiah is one of depreciation, especially as geopolitical tensions come at a time when the US Federal Reserve is looking to aggressively raise interest rates in order to combat the rampant inflation in the world’s largest economy.

Higher US interest rates generally dampen the attractiveness of assets in riskier emerging markets like India.

The prospect of tighter US monetary policy has already prompted foreign institutional investors to drastically reduce their holdings of Indian equities in recent times. NSDL data showed that FIIs have sold net domestic stocks of Rs 52,477 so far in 2022.

The headwinds on the inflation front also pushed up sovereign debt yields, with the yield on the benchmark 10-year 6.54% 2032 bond standing at 6.75%, up 6 points. basic. Bond prices and yields move in opposite directions.

While the Reserve Bank of India, in its policy statement earlier this month, unexpectedly refrained from raising the reverse repo rate and reiterated the need to support economic growth, brokers bonds feared that the central bank’s inflation projections could be exceeded, which could lead to a sharp tightening of monetary policy. Politics.

The Centre’s decision to go ahead with a gilt auction slated for Rs 23,000 crore this week also weakened market sentiment, with the government canceling the two previous debt auctions, likely to calm concerns. sovereign borrowing costs after the budget announced a gargantuan plan for bond sales. in the upcoming exercise.