If 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:

QUESTION

Medium

Economy

Prelims 2020

If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India?

Not depending on short-term foreign borrowings
Opening up to more foreign banks
Maintaining full capital account convertibility

Select the correct answer using the code given below:

Select an option to attempt

Explanation

Not depending on short-term foreign borrowings: This reduces exposure to capital flight. During a crisis, foreign investors may pull their money out of emerging markets like India, leading to rupee depreciation and financial instability. By limiting short-term foreign borrowings, India can lessen the impact of such capital flight.

Opening up to more foreign banks: While this might seem beneficial, it can also increase reliance on foreign capital. During a crisis, foreign banks might be more likely to restrict credit, negatively impacting the Indian economy.

Maintaining full capital account convertibility: This allows for the free movement of capital in and out of the country. While it can be beneficial in normal times, it can also exacerbate capital flight during a crisis.

Therefore, the most prudent strategy is to reduce dependence on short-term foreign borrowings to minimize the vulnerability caused by potential capital flight.

Hence, only statement 1 is correct. Hence, option A is the correct answer.

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