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 :
- (a) 1 only ✓ UPSC's answer
- (b) 1 and 2 only
- (c) 3 only
- (d) 1, 2 and 3
Why the answer is (a)
• Global crises transmit through sudden capital flight; economies with heavy short-term external debt (as in the 1997 Asian crisis) suffer most.
• Item 1 is correct: avoiding dependence on short-term foreign borrowings limits rollover risk and gives immunity.
• Item 2 is wrong: more foreign banks deepen linkages to troubled parent institutions and can transmit shocks.
• Item 3 is wrong: full capital account convertibility removes the controls that let India ride out 2008 with limited damage; it increases, not reduces, vulnerability.
• Hence 1 only, option (a).
Why the other options are wrong
- (b) 1 and 2 only
- More foreign banks increase contagion risk.
- (c) 3 only
- Full convertibility increases vulnerability to capital flight.
- (d) 1, 2 and 3
- Items 2 and 3 heighten, not reduce, exposure.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2020, held on 4 October 2020. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.