What is Black Swan Event which may trigger outflows of Rs 7.8 trillion from India? - Explainer of the Day

Black Swan Event RBI: A Black Swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.

Updated: Jun 23, 2022 15:10 IST
Black Swan Event RBI
Black Swan Event RBI

Black Swan Event UPSC: In the Reserve Bank of India’s latest bulletin, an article titled ‘Capital Flows at Risk: India’s Experience’ cautioned about an event- comprising a combination of shocks- which might lead to portfolio outflows of about $100 billion or Rs. 7,80,000 crores. Authored by the Deputy Governor of Reserve Bank of India (RBI) Michael Debabrata Patra, along with Harendra Behera and Silu Muduli, the report called for maintaining liquid reserves to deal with the event which is known as Black Swan.

What is a Black Swan event?

A Black Swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.

Black Swan event is said to have three distinguishing characteristics- they are extremely rare and outside the realm of regular expectations; they seem probable in hindsight when plausible explanations appear and they have a severe impact after they hit.

Black Swan Event: When did the term appear?

The Black Swan theory was put forward by an author and investor Nassim Nicholas Taleb in 2001, and later popularised the term in a 2007 book- ‘The Black Swan: The Impact of Highly Improbable’. His work has also been described as one of the 12 most influential books since World War II.

In his book ‘Black Swan: The Impact of Highly Improbable’, Taleb does not try to lay out a method to predict such events, however, instead of stressed robustness in systems and the strategies to deal with Black Swan occurrences and withstand their impact.

Black Swan term is itself linked to the discovery of Black Swans. Europeans believed all the swans to be white until 1697 when a Dutch explorer spotted the first black swan in Australia.

The metaphor ‘Black Swan Event’ is derived from this unprecedented spotting from the 17th century, and how it upended the West’s understandings of Swans.

Black Swan Event: When have such events occurred in the past?

Nassin Nicholas Taleb’s book predated the 2008 global financial crisis- a black swan event triggered by a sudden crash in the booming housing market in the United States. The fall of the Soviet Union, and the terrorist attack in the United States on September 11, 2001, are also called Black Swan events.

Was COVID-19 pandemic a Black Swan Event?

Author Taleb does not agree with those who believe it to be one. He instead called it 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.

While the outbreak of any pandemic is difficult to individually predict, the possibility of one occurring and having major impact on systems around the world is known and documented.

How Black Swan event is related to RBI outflows?

In the context of capital flows, the RBI report says that the Capital outflows, particularly, portfolio flows are driven by the global risk aversion and they are sensitive to shifts in risk sentiment globally. So, if there is an adverse event like COVID type contraction in real GDP growth or a global financial crisis like a decline in interest rate differentials, India could see capital outflows to the tune of 3.2 percent of GDP or approx. $100 billion.

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