Raghuram Rajan’s warning to India after Hormuz shock: Build bigger oil reserves, diversify faster

Economist Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business, says the global economy is still absorbing the shocks of disrupted trade routes, tariff battles and geopolitical tension, even though headline trade volumes haven’t collapsed. Speaking to ET Now, Rajan argued that the cumulative effect of these disruptions, including the Strait of Hormuz crisis and US tariff actions, will reshape how countries think about economic resilience, even if the damage isn’t immediately visible in the data.

On energy security, Rajan was direct: a potential US-Iran peace deal does not erase the underlying vulnerability that the Hormuz disruption exposed. He noted that the strait accounts for a significant share of India’s crude, LNG and LPG imports, and said India needs a much larger strategic oil reserve than it currently has. Rajan also pointed to the need for flexible backup options, such as the ability to ramp up coal production the way China has, alongside a longer-term push toward renewables. He cautioned, however, that renewable energy carries its own supply-chain risk, since India still depends heavily on imported solar cells and wind components, and called for Indian industry to take a bigger role in building domestic alternatives — something he said hasn’t happened yet.

India needs to diversify import sources & export markets

On trade, Rajan said India is currently in a better position than earlier this year, when it faced steep tariff threats from the US. He flagged an incoming tariff tied to forced-labor concerns, set at 12.5%, slightly higher than the roughly 10% rates facing Pakistan and Bangladesh, but said the gap is manageable. A bigger risk, he said, is a separate “excess capacity” probe that could stack additional tariffs on top of the existing rate, something he hopes Indian trade officials can head off. His broader takeaway: India needs to diversify both its import sources and export markets to reduce exposure to any single shock.

Rajan also addressed the rupee’s sharp depreciation, which has fallen close to 14% against the dollar over two years. He linked the slide less to oil prices alone and more to a structural problem: India isn’t attracting enough foreign direct investment, even as remittance inflows remain strong. He questioned why domestic investment hasn’t matched the country’s strong headline GDP growth, calling it a gap between “the walk” and “the talk” that policymakers need to examine. If global oil prices hold near current levels — around $85 a barrel, assuming the ceasefire holds — Rajan said India’s current account position looks “relatively mild” rather than alarming, and even suggested policymakers may be overreacting by considering costly capital-inflow incentives like the FCNR(B) proposal.

Looking ahead, Rajan urged India to take a three-to-five-year view on critical commodity exposure, warning that the next vulnerability may not be oil but pharmaceutical inputs used to manufacture generic drugs. He called for building strategic buffers, domestic production capacity, and stronger ties with friendly supply countries — describing the recent shocks as a “wake-up call” that policymakers and industry should not let go to waste.