RBI warns of black swan event in India. What is it?

A 'black swan' event is a rare event that happens unexpectedly and causes a severely negative impact after its occurrence. It comes out of thin air and leaves people shaken. Now, the RBI has identified a possible rare and extreme situation that can occur in India and has come up with a study that describes what they could do if a black swan event happened in India. But what does a black swan event look like? Here's what you should know: 

Remember the jaw-dropping 9/11 attacks that left everyone across the globe in shock? No one could fathom how a plane could fly into two tall buildings in the USA in broad daylight. The attack of this scale was massive and unimaginable and no one had words to describe the consequences. 

No one was ready for the severe impact of Covid-19 either. The world spent most of 2021 trying to reel out of the shock that was triggered by Covid. The isolation, the failing businesses, the stock market crashes and the complete shift in interactions simply overturned lives within weeks. Though rare, a tiny virus had unexpectedly appeared out of thin air and caused irreparable financial, emotional and mental damage. 

The Maharashtra political crisis where political party members shifted parties... wait. Naah, that's not rare and surprising anymore. Never mind.

If you evaluate the 9/11 attacks and the Covid crisis, you will find three common characteristics:

1. These are rare events and can be described as 'once-in-a-life time'.
2. They have a severe impact after they occur.
3. They seem to be quite probable to occur once their main reason of occurrence is found out. 

This kind of rare event is called a black swan event. 

NOW, WHY IS RBI TALKING ABOUT A BLACK SWAN EVENT? 

The Central Bank of India ie the Reserve Bank of India (RBI), is responsible to maintain the monetary stability in the country and take precautionary and vital measures to keep the economy as stable as possible. RBI also conducts research and publishes papers on related topics and given the current economic conditions, it has identified a possibility of a black swan event happening in India.

Though bank loan defaults aren't really rare (thanks to the folks who managed DHFL, Satyam, Kingfisher, Nirav Modi Jewels etc), the idea of banks facing defaults on a large scale due to lack of growth in the economy or productivity loss, is surely an extreme and a rare event. So, the RBI came up with a study to analyse a scary possibility: What if something like that actually happened? What would RBI do to then save these banks from this kind of a black swan event? Here's what the study said:

1. Inflation levels across the world are rising like never before and this is leading major central banks across the globe to raise their interest rates. This has never happened at this scale before. 
2. As global stock markets crash due to uncertainty, India has seen a major trend where foreign investors are pulling out their money from Indian stock markets. This is also triggered by the fact that the rupee has never been reduced to this level ever before in all these years. This is leading foreign investors to feel that their money isn't safe in India.    
3. Out of existing foreign capital investment of Rs 34,04,000 crore ($398 billion), capital investments worth Rs 7,80,000 crore ($100 billion) could flow out of India if the current financial trends became a black swan event. ($398 billion = $288 billion dollars of equity investment and $110 billion of short-term credit). 
4. As per the NSDL, foreign portfolio investors have pulled out a record Rs 2,08,587 crore from the Indian markets from January to March 2022. Of this, about Rs 1,98,585 crore was withdrawn because the US federal reserve decided to tame inflation and the Russia- Ukraine war by focusing on global monetary tightening.