After oil surge, Fed rate hike will shape challenge

In the short run, the hope is of some kind of a deal to manage shipping through the effectively shut Hormuz as well as the now-threatened Bab el-Mandeb chokepoints.

3 min readSep 14, 2026 06:05 AM IST First published on: Sep 14, 2026 at 06:05 AM IST

On Wednesday, Brent crude traded above $100-per-barrel for the first time after May 26, touching $110 during the week before closing at $104.6. This week could see the US Federal Reserve raise interest rates when the central bank’s open market committee meets on September 15-16. Unlike oil — where the trigger for the recent price surge has been the Iranian-aligned Houthi militia’s seizure of virtually Yemen’s entire Red Sea coast, threatening navigation through the vital Bab el-Mandeb Strait — the markets have already priced in the Fed’s rate hikes. Ten-year US Treasury bond yields are almost at 5 per cent, the highest since October 2023. The West Asia conflict’s ripple effects are also being felt through US producer price inflation hitting 5.4 per cent year-on-year in August and diesel prices soaring to a record $6.20 a gallon.

All this matters greatly for India, as an importer of both energy and capital. The higher the prices of oil, and the longer they stay so, the more the impact, in terms of inflation and growth slowdown. The same goes for interest rates. When yields on 10-year government securities are near 3 per cent in Japan, 5 per cent in the US and 5.4 per cent in the UK, why should foreign investors put money in India, where returns aren’t as assured or high, after adjusting for currency depreciation risks? Elevated international energy prices widen India’s current account deficits. These become harder to finance in a rising global interest rates scenario, as capital flows shift to the safe-haven assets of industrialised countries. India has weathered the Iran war-induced energy supply shock relatively well so far. The $127.2 billion of FCNR(B) deposits mobilised through the RBI’s special dollar-rupee swap facility has also stemmed the run on the rupee.

In the short run, the hope is of some kind of a deal to manage shipping through the effectively shut Hormuz as well as the now-threatened Bab el-Mandeb chokepoints. The important challenge for India, however, lies in boosting its export competitiveness and attracting long-term foreign investor interest. Key to the first is elimination of duties on imported raw materials and components, besides continued investments in roads, railways, inland and coastal waterways, and port infrastructure. The latter entails creating an environment where investors are confident about India not just being a robust long-term growth story, but offering policy predictability and stability. On top of these is the need for fiscal prudence and to guard against government overspending spilling over into higher current account deficits.