homeworld NewsRaghuram Rajan: Ukraine Russia war could have long term impact on already high inflation
world | Mar 8, 2022 7:49 PM IST

Raghuram Rajan: Ukraine-Russia war could have long-term impact on already-high inflation

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In an exclusive interview to CNBC-TV18, the former RBI Governor said the Russia-Ukraine war is coming on top of an already high level inflation. Add to it the effects of war, this further increases inflation and reduces growth, he said. Rajan further said Russia is not a huge player in the global economic landscape in terms of size, but plays a key role in global critical supply chains.

Former Reserve Bank of India governor Raghuram Rajan on Tuesday took a cautionary stance and suggested that the effects of the Russian invasion of Ukraine might have long-term effects on inflation.

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During an interview with CNBC-TV18's Latha Venkatesh on whether the effect of the war on inflation is a temporary blip, Rajan said, "It (the war) is coming on top of an already high level of inflation. Add to it the effects of war, this (further) increases inflation and reduces growth; increases the effect on inflation in the US and Europe. There is a risk that inflationary expectations will become more entranched ... not good news," Rajan said.
On the sanctions being imposed, and their potential effects on global economy, Rajan gave a two-pronged answer: "The unprecedented nature of the attack on Ukraine has galvanised the west, and Japan, and they are much more determined to implement sanctions and prevent leakages. They see the war as a violation of world order and the sanctions as way to restore it."
Rajan added, "That said, these sanctions could also do a lot of damage -- Russia is a crucial exporter of energy (especially to Europe), commodities, fertiliser and even grain."
Crude oil prices have been soaring over the past few days because of the war, touching four-decadal highs. On this, Rajan said, "Crude oil will have to be offset from other suppliers," and added, "Shale has been circumspect on production due to a lack of investment; that could change. The supply side will start responding to high prices even as demand starts falling due to high prices in next few months. Short-term supply disruptions can be looked through; long-term disruptions will have to be replied to," the former RBI chief said.

Rajan said Russia is not a huge player in the global economic landscape in terms of size, but plays a key role in global critical supply chains like semiconductors.

"Russia’s size is not the big factor in global economy, its role in essential commodity supply chain is. The world is overly dependent on carbon energy; must back off from it. We can work through  short-term pain while the renewed push on renewable energy sources comes into play," Rajan said.

Overall financial exposure of the world to Russia is moderate, not huge, Rajan said. "We have learnt that the problem of the size of a default is not as important as where it occurs. It is too early to panic on the notion that there could be widespread problems across the global financial system,' he added.

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