Raghuram Rajan’s Warning to India After Hormuz Shock: Build Big Oil Reserves, Diversify Fast

Economist Raghuram Rajan, professor of finance at the University of Chicago Booth School of Business, says the global economy is still absorbing the shock of disrupted trade routes, tariff wars and geopolitical tensions, although headline trade volumes have not fallen. Speaking to ET Now, Rajan argued that the cumulative impact 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 is not immediately visible in the data.

On energy security, Rajan was straightforward: A potential US-Iran peace deal cannot erase the underlying vulnerability exposed by the Hormuz standoff. He noted that the strait accounts for a significant share of India’s crude, LNG and LPG imports and said India needs much larger strategic oil reserves 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, along with a long-term push toward renewables. He warned, however, that renewable energy carries its own supply-chain risks, as India is still heavily dependent on imported solar cells and wind components, and called for Indian industry to play a bigger role in building domestic alternatives – something he said has not yet happened.

India needs to diversify its import sources and export markets

On trade, Rajan said India is now in a better position than earlier this year, when it faced heavy tariff threats from the US. He flagged an incoming tariff linked to forced labor concerns, set at 12.5%, slightly higher than the roughly 10% rates against Pakistan and Bangladesh, but said the difference was manageable. A bigger risk, he said, is a separate “overcapacity” probe that could stack additional tariffs on top of existing rates, which he hopes Indian trade officials can move forward with. His broad take: India needs to diversify both its import sources and export markets to reduce exposure to any single shock.

Rajan also addressed the sharp depreciation of the rupee, which has come close to 14% against the dollar in two years. He linked the slide less to just oil prices and more to a structural problem: India is not attracting enough foreign direct investment despite strong remittance flows. He questioned why domestic investment did not match the country’s strong headline GDP growth, calling it a gap between “the walk” and “the talk” that policymakers needed to check. If global oil prices remain close to current levels — around $85 a barrel, assuming a ceasefire — Rajan said India’s current account position looks “relatively soft” rather than alarming, and also suggested policymakers may be overreacting by considering costly capital-flow incentives like the FCNR(B) proposal.

Looking ahead, Rajan urged India to take a three-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 strategic buffers, domestic manufacturing capacity and stronger ties with friendly supply countries – describing the recent setbacks as a “wake-up call” that policymakers and industry should not let go to waste.