If another global financial crisis happens in the near future, which o

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

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1 only

1 and 2 only

3 only

1, 2 and 3

Answer is Right!

Answer is Wrong!

This question was previously asked in

UPSC IAS – 2020

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Statement 1 is correct: Short-term foreign borrowings are highly volatile and can be withdrawn rapidly during a global financial crisis. An economy that depends less on such borrowings is less vulnerable to sudden capital flight, which can trigger liquidity problems and currency depreciation.

Reducing reliance on volatile short-term foreign debt enhances an economy’s resilience against external financial shocks.

Statement 2 is incorrect: While opening up to foreign banks can bring benefits like increased competition and technology, it can also introduce risks of contagion from their home countries during a global crisis. Their presence does not necessarily provide immunity; it can potentially increase exposure. Statement 3 is incorrect: Maintaining full capital account convertibility allows unrestricted movement of capital in and out of the country. While beneficial in normal times, it makes the economy highly susceptible to massive capital outflows (sudden stops) during a global financial crisis, significantly increasing vulnerability rather than providing immunity.

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