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:
Correct Answer: Option A
In the event of a global financial crisis, reduced exposure to foreign financial markets is likely to offer India some protection.
Statement 1 is correct: Reliance on short-term foreign borrowings increases the risk of financial stress during a crisis due to repayment obligations.
Statement 2 is incorrect: Opening up to more foreign banks would actually increase India's exposure to the global economy and its associated risks.
Statement 3 is incorrect: Full Capital Account Convertibility (CAC) allows for the free exchange of domestic currency into foreign currency and vice-versa for capital account transactions. While it can attract investment, it also carries risks: * It increases vulnerability to external economic shocks. * It can lead to capital flight, where investors rapidly withdraw their money, destabilizing the economy. The RBI would have less control over fund withdrawals with full convertibility.
Hence, only statement 1 is correct.