Question
Download Solution PDFIf another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India?
1. Not depending on short-term foreign borrowings.
2. Opening up to more foreign banks.
3. Maintaining full capital account convertibility.
Select the correct answer using the code given below:
Answer (Detailed Solution Below)
Detailed Solution
Download Solution PDFThe correct answer is option 1.
Key Points
- Not Depending on Short-Term Foreign Borrowings:
- Short-term debts are those that need to be repaid within a short period.
- If India avoids relying on short-term foreign borrowings, it reduces the immediate financial obligations and vulnerabilities during a global financial crisis.
- This would provide some level of immunity as there would be less pressure to pay back foreign debts in the short term, thus insulating the economy from sudden external shocks.
- Hence, statement 1 is correct.
- Opening Up to More Foreign Banks:
- During a global financial crisis, foreign banks tend to reduce lending and retreat from cross-border banking activities, including withdrawing investments and limiting new market entries.
- Therefore, opening up more foreign banks in India does not necessarily provide immunity and could potentially increase exposure to external financial shocks.
- Hence, statement 2 is not correct.
- Maintaining Full Capital Account Convertibility:
- Full capital account convertibility means that there are no restrictions on converting domestic currency into foreign currency for capital account transactions.
- While this allows for free movement of capital, it can also lead to increased vulnerability during economic crises.
- In adverse conditions, unrestricted capital flows may result in sudden capital flight, worsening the financial situation.
- Hence, statement 3 is not correct.
Additional Information
- Capital Account Convertibility:
- This policy enables the free exchange of domestic currency with foreign currencies for capital transactions, promoting investment and financial integration.
- However, during financial instability, it can lead to sudden outflows of capital, intensifying economic challenges.
- Short-Term Borrowings:
- High dependency on short-term foreign borrowings increases a country's risk during global financial turmoil, as it creates an obligation to repay loans promptly, often leading to a drain on foreign exchange reserves.
- Foreign Banks:
- While foreign banks contribute to economic growth and financial development, they tend to retreat during global financial crises, limiting credit and liquidity, which can negatively affect the host country's economy.
Last updated on Jul 7, 2025
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