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:
Explanation
Analyzing macroeconomic buffers against international financial contagion:
– 1. Avoiding short-term foreign debt (Correct): Short-term external commercial debt creates high rollover risk during international liquidity freezes. Relying on long-term domestic capital protects external sector solvency and prevents balance-of-payments shocks.
– 2. Opening up to more foreign banks (Incorrect): During severe global financial crises, foreign banking subsidiaries often experience sudden capital retrenchment, repatriating credit back to their distressed overseas parent headquarters, aggravating domestic credit crunches.
– 3. Maintaining full capital account convertibility (Incorrect): Unrestricted capital account convertibility enables sudden speculative capital flight and destabilizing currency depreciation during global market panics. Managed capital controls on debt flows protect domestic macroeconomic stability.
Therefore, only action 1 provides effective immunity — Option A.