According to Reserve Bank of India researchers, a black swan occurrence might result in outflows of Rs 7.8 trillion from the country. What are “black swan” incidents, and how are they different from other events?
Reserve Bank of India’s Latest Bulletin
According to a post in the latest Reserve Bank of India bulletin, an incident that could result in the outflow of around $100 billion or Rs 7,80,000 crore was described in the post titled “Capital Flows at Risk: India’s Experience.”
Michael Debabrata Patra, along with Harendra Behera and Silu Muduli, wrote the paper, which urged for keeping liquid reserves in case of a “black swan” financial crisis.
The Black Swan Theory
Black Swan is a once-in-a-lifetime occurrence with unpredictably dire implications.
Former Wall Street trader Nassim Nicholas Taleb initially proposed the concept of the “black swan” in 2001. ‘The Black Swan: The Impact of the Highly Improbable’ was the title of Taleb’s book on the subject.
There are three characteristics of the event, according to Taleb. First, because it’s an outlier, it’s impossible to forecast what will happen next. Second, it has a significant impact, and third, it is in our propensity to seek explanations once something unexpected occurs.
It can be described as a combination of all of the negative shocks that have occurred throughout the history of the country.
A few recent instances of the “black swan” phenomenon
Because of the rapid collapse of the U.S. housing market, the global financial crisis may be described as a black swan occurrence. Others are the September 11 terrorist attacks and the dot.com bubble crash in the 1990’s.
As it pertains to capital flows, the RBI study states that portfolio outflows are driven by global risk aversion and are hence subject to global variations in risk perception. Capital outflows of around $100 billion could occur if India experiences a “Covid-type slowdown in real GDP growth” or “global financial crisis type drop in interest rate differentials.”