Unknown unknowns

Risk of a global shock will increase with higher rates

Indian policymakers may be underestimating the risk posed to the Indian economy by global macro conditions that have turned sharply adverse. A recent paper in the Reserve Bank of India monthly bulletin argued that in the case of adverse shocks to volatility or spreads of a magnitude on a par with historical evidence, capital outflows from India would average 3.2 per cent of gross domestic product. A “black swan” event that puts several adverse shocks together might lead to an exit of capital that would be more than double that. In the former case, at least, there may be no