Raghuram Rajan was born in Bhopal, India. In 1985, he graduated from the Indian Institute of Technology, Delhi, with a bachelor's degree in Electrical Engineering; he earned an MBA at the Indian Institute of Management, Ahmedabad in 1987. He received his PhD in Economics from the Massachusetts Institute of Technology (MIT) in 1991 with a thesis entitled "Essays on Banking."

After graduation, Rajan joined the Graduate School of Business at the University of Chicago.

He was the "Economic Counselor and Director of Research" (Chief Economist) at the International Monetary Fund from September 2003 until January 2007. In 2003, he was also the inaugural recipient of the Fischer Black Prize awarded by the American Finance Association for contributions to the theory and practice of finance by an economist under age 40.

In 2005, at a celebration honoring Alan Greenspan, who was about to retire as chairman of the U.S. Federal Reserve, Rajan delivered a controversial paper that was critical of the financial sector. In that paper, "Has Financial Development Made the World Riskier?", Rajan "argued that disaster might loom." Rajan argued that financial sector managers were encouraged to

(take) risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks.[...] But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialize, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimized.

Thus Rajan described the 2007-2008 collapse of the world's financial system.

The response to Rajan's paper at the time was negative. For example, former U.S. Treasury Secretary and former Harvard President Lawrence Summers called the warnings “misguided.”

In April 2009, Rajan penned a guest column for The Economist, in which he proposed a regulatory system that might minimize boom-bust financial cycles.

His book, Saving Capitalism from the Capitalists, was co-authored with fellow Chicago Booth professor Luigi Zingales and published in 2004. He has also published in the Journal of Financial Economics, Journal of Finance and Oxford Review of Economic Policy. His other book, How Hidden Fractures Still Threaten the World Economy was published in 2010.