SYLLABUS SECTION: GS III (ECONOMY)
WHY IN THE NEWS?
A study by the Reserve Bank of India (RBI) has spoken about the possibility of capital outflows to the tune of $100 billion (around Rs 7,80,000 crore) from India in case of a major global risk scenario or a black swan event.
Black Swan Event:
- The black swan theory put forward by author and investor Nassim Nicholas Taleb in 2001,
- And later popularise it in his 2007 book – The Black Swan: The Impact of the Highly Improbable.
- A black swan is a rare, unpredictable event that comes as a surprise,
- And has a significant impact on society or the world.
- These events were said to have three distinguishing characteristics:
- They are extremely rare and outside the realm of regular expectations;
- They have a severe impact after they hit; and
- They seem probable in hindsight when plausible explanations appear.
- There is a 5-per-cent chance of portfolio outflows from India.
- It is of the order of 3.2 percent of GDP or $100.6 billion in a year in response to a Covid-type contraction in real GDP growth,
- Or a GFC (global financial crisis) type decline in interest rate differentials vis-a-vis the US or a GFC type surge in the volatility index (VIX).
- According to the RBI report, these estimates assume significance when assessed against the total stock of portfolio investment in India,
- They are of $288 billion and short-term trade credit of $110.5 billion at the end of December 2021.
- This is indicative of the level of liquid reserves that need to be maintain at all times,
- In addition to standard metrics of import and debt servicing cover to quell bouts of instability.
- The volatile capital flows can impose on a dynamic and highly uncertain global setting in which pandemics, supply chain disruptions, elevates commodity prices, and geopolitical tensions keep interacting and intertwining.
- The RBI’s findings suggest the predominant role of pull factors in attracting capital flows to India, key among them being growth differentials and domestic term premia.
- On the other hand, it is global risk aversion, reflected in the VIX, which drives capital outflows.
Is the Covid-19 pandemic a black swan event?
- According to Taleb, it is a “white swan”, arguing that it was predictable, and there was no excuse for companies and governments not to be prepared for something like this.
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SOURCE: INDIAN EXPRESS