Former RBI Governor Raghuram Rajan has issued a stark warning on the global economic fallout of the ongoing US-Israeli war against Iran, cautioning that a prolonged conflict could trigger an unprecedented oil shock, destabilise financial systems, and leave oil-dependent economies like India particularly exposed. As the war enters its third week, Rajan underlined that the trajectory of the global economy now hinges critically on how long the conflict persists.
Speaking to India Today’s Rajdeep Sardesai, Rajan said, “I think the important question is how long it lasts”, warning that even a short conflict has already caused disrupted energy for about 20% of the total production of energy sources across the world.
While some countries have temporarily cushioned the blow using reserves, he stressed that “the longer this goes on the more impact it will have.”
Rajan flagged a worst-case scenario where supply disruptions force a sharp correction in demand.
“If you’re trying to adjust to the fact that 15 to 20% of world energy sources are shut in, you have to have tremendous demand destruction,” he said, adding that “oil prices will be in the $150, $200 a barrel range.”
Such levels, he noted, are largely uncharted territory and could trigger widespread economic stress. “The world economy is in serious trouble” if the war extends for another month, he cautioned.
The crisis is being exacerbated by vulnerabilities around the Strait of Hormuz, a critical chokepoint through which a significant share of global oil and gas flows.
Asian economies—including India, China, Japan and South Korea—face the highest exposure.
Rajan explained that disruptions here would not remain regional. “What happens in Asia doesn’t stay in Asia prices will show up everywhere,” he said, including in relatively insulated economies like the US.
Beyond energy markets, Rajan warned of broader macroeconomic consequences.
High oil prices could fuel inflation at a time when many economies are already struggling with elevated price pressures. “With high energy prices, interest rates have to stay higher to combat inflation, and economies aren’t positioned for that,” he argued, adding that rising borrowing costs and existing fiscal deficits could trigger “risks from the financial sector if this lasts much longer.”
‘INDIA PARTICULARLY VULNERABLE’
India, he emphasised, is particularly vulnerable due to its heavy reliance on imported crude.
“Every government is vulnerable, because oil prices affect so much of the economy,” Rajan said, while acknowledging that India’s inflation-targeting framework has so far helped anchor expectations.
However, sustained price shocks would make it increasingly difficult to contain inflation within acceptable bounds.
He also cautioned against prolonged state intervention to shield consumers.
“India simply cannot subsidise oil on a semi-permanent basis,” Rajan warned, arguing that if high prices persist, “the consumer will have to adjust, the farmer will have to adjust, producers will have to adjust.”
He added that excessive subsidies would strain fiscal balances, making them unsustainable over time.
Highlighting the external sector risks, Rajan noted that rising oil prices could sharply widen India’s current account deficit.
Even a moderate increase in crude prices has significant implications, and a sustained surge could compound pressures on the rupee and overall macroeconomic stability.
Looking ahead, Rajan called for a strategic rethink. He advocated expanding strategic petroleum reserves, diversifying energy sources, and building resilience across critical supply chains.
“We need a strategic resilience plan across the country across many inputs,” he said, pointing to vulnerabilities in sectors like pharmaceuticals and semiconductors.
Conclusively, Rajan described the conflict as a “wake-up call” for policymakers worldwide. While short-term buffers may help, he stressed that one simply cannot subsidise their way out of this crisis. If the war drags on, economies will have to make hard adjustments, with oil prices, inflation, and global growth all hanging in the balance.
