Markets Underestimating Uncertainty and Tariff Levels Unsustainable, Warns Raghuram Rajan

Former RBI Governor Raghuram Rajan is raising red flags about the direction of the global economy, and he’s not mincing words. In a recent interview with India Today TV, Rajan warned that financial markets are acting as if everything is fine despite significant risks looming.

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Markets Aren’t Reading the Room

Rajan pointed out that the world economy is facing a wave of uncertainty, from rising geopolitical tensions and unstable supply chains to unpredictable policy shifts. But despite all that, markets seem strangely relaxed.

“Markets are not pricing uncertainty right,” he said. Translation? There is a significant gap between the confidence investors express and the actual state of the economy. And that mismatch could cause some serious trouble if unexpected events catch markets off guard.

High Tariffs? “Untenable”, Says Rajan

Rajan didn’t hold back on trade policies either, especially the 100% import tariffs being floated by former U.S. President Donald Trump, which targeted BRICS countries. He believes these kinds of protectionist measures are shortsighted and harmful on a global scale.

“These tariff hikes are a big source of uncertainty and disruption,” Rajan explained. And for the U.S.? “They’re not going to deliver the benefits some people are hoping for.”

He added that the idea of bringing manufacturing back to the U.S. through tariffs doesn’t hold up. Often, production shifts from one low-cost country to another; consider Vietnam instead of China rather than returning to American soil.

Supply Chains and Investment Are at Risk

Rajan warned that the unpredictability of such trade moves could disrupt global supply chains and deter investors. If tariffs can shift overnight, businesses have no idea where to put their money or their factories.

“You’d be investing blind,” he said. “And don’t forget, other countries would hit back with their tariffs.”

A Word of Caution for India

Shifting focus to India, Rajan offered some advice: be cautious in how you interpret Aatmanirbhar Bharat. If it means jacking up tariffs to block imports, that’s a path India’s already tried, and it didn’t work then either.

“We’ve done a lot of tariff-raising in the past few years,” he said during a webinar hosted by SPJIMR’s Centre for Financial Studies. “Let’s not go down that road again.”

Instead, Rajan argued for a more open approach. Keeping tariffs low could help attract global supply chains and generate jobs.

Subsidies Aren’t a Silver Bullet

Rajan also raised eyebrows at the growing trend of handing out massive subsidies to domestic industries, particularly in sectors such as semiconductors. He warned this could backfire by making firms too reliant on government support, which stifles innovation and cuts into profits across the board.

What’s the better path? For countries like India, Rajan believes the answer lies in building a strong infrastructure and investing in education, not creating artificial advantages for specific industries.

Bottom Line

Rajan didn’t just highlight problems; he laid out a vision. One that favours smart, long-term investments over knee-jerk protectionism. His message was clear: open economies, stable policies, and strong foundations are the keys to navigating today’s uncertain world.