RBI report: ‘Black Swan’ event may trigger around 7.8 lakh cr outflow

Last Updated21/06/2022

RBI Study: Capital outflows of around Rs 7,80,000 crores are likely to take place from India in a major global risk scenario or a black swan event.

There is a 5% chance of portfolio outflows from India of the order of 3.2 per cent of GDP 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), the RBI study said.
Capital flows: In an extreme risk scenario, there is 5% chance of outflows under portfolio investments of 7.7 per cent of GDP and short-term trade credit retrenchment of 3.9 per cent of GDP.
Attention has turned from benefits associated with capital flows to their consequences such as accentuating financial vulnerabilities, aggravating macroeconomic instability etc.

These assessment are significant when assessed against the total stock of portfolio investment in India of $288 billion and short-term trade credit of $110.5 billion at the end of December 2021.
It is indicative of level of liquid reserves that need to be maintained at all times to counter instability that volatile capital flows can impose in a dynamic and highly uncertain global setting.

According to NSDL data, foreign portfolio investors have pulled out a record Rs 2,08,587 crore from Indian markets in calendar year 2022 so far.
Of this, Rs 1,98,585 crore was withdrawn from stock markets after global monetary tightening led by US Federal Reserve to tame inflation and negative impact of Ukraine war.
High inflation in the US and other advanced economies is likely to lead to more rate hikes in these countries.
For India, portfolio flows are most sensitive to shifts in risk sentiment globally and spillovers.

Bretton Woods type prescriptions such as tightening of monetary and fiscal policies, exchange rate adjustments and structural reforms in some kind of pecking order as a hierarchy will not work.
Spillovers can be global, but the responsibility for macroeconomic and financial stability is national.
Focus attention on role of international reserve accumulation as the only reliable safety net.

Black Swan Theory

Black Swans are unpredicted, random events of huge impact.
They deviate from the normal expected course.
Also called outliers as there is no reference data in the past which gives any clue to their occurrence in the future.
Black Swan events can take place in business, politics, stock markets etc.
These events are unforeseen and thus cannot be predicted.