Gulf Oil Shock Trumps Fed Rate Hike as India's Central Concern

The Federal Reserve's decision to raise interest rates by 25 basis points on September 16 has already been factored into markets, and its impact on India is secondary to a more pressing concern: the Gulf oil shock.

Oil prices have surged due to damaged infrastructure and shipping risks in the Gulf, pushing Brent crude towards $110 a barrel before easing back to $98 as Saudi Arabia's East-West Pipeline came back online. The situation remains volatile, with Brent still up nearly 46% from last year's levels.

The Reserve Bank of India (RBI) has been monitoring this development closely and is concerned about its impact on inflation and growth. India's retail inflation rose to 4.82% in August, while wholesale prices climbed to 9.92%, driven by skyrocketing oil prices.

The RBI has also taken steps to defend the rupee, which has been under siege due to foreign portfolio outflows and high oil prices. The central bank's decision to sell bonds worth ₹1 trillion is aimed at draining surplus liquidity created by a diaspora deposit scheme that drew $127.2 billion in FCNR(B) deposits.