Question

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:

1. 1 only
2. 1 and 2 only
3. 3 only
4. 1, 2 and 3

Answer 1

Correct Answer - Option 1 : 1 only

The correct answer is 1 only.

• Capital Account Convertibility
  • It means the freedom to convert rupee into any foreign currency and foreign currency back into rupee for capital account transactions.
  • It leads to a free exchange of currency at a lower rate and an unrestricted movement of capital.
• The short-term debts are the debts that are to be returned in a shorter interval. If India is not dependent on short-term foreign borrowings, it means that it does not have to worry about paying back in near future. In the case of the global financial crisis, India will be immune if it does not depend on short-term debts. Hence statement 1 is correct.
• During the Global Financial crisis, the foreign banks reduce their lending and choose to retreat from cross-border banking in general, including through cutting back on the new entry. Hence, opening up foreign banks cannot provide immunity. Hence statement 2 is not correct.
• Capital account convertibility means that there is no restriction on the conversion of the domestic currency into a foreign currency. Any deterioration in fiscal conditions, inflation management, the balance of payments, or any other economic crisis may cause a stoppage or reversal of capital flows. Hence statement 3 is not correct.