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?
(A) Not depending on short-term foreign borrowings.
(B) Opening up to more foreign banks.
(C) Maintaining full capital account convertibility.
Choose the correct answer using the options given below:

• A. (A) only
• B. (C) only
• C. (A) & (B) only
• D. (A), (B) & (C)

Answer 1

The Correct Option is A

To determine which actions or policies could provide immunity to India in the event of another global financial crisis, let's evaluate each option given:

1. Not depending on short-term foreign borrowings (Option A): Short-term foreign borrowings can be volatile because they are subject to sudden stops or reversals during global financial turbulence. Reducing reliance on these borrowings can help stabilize the economy by reducing vulnerability to external shocks. Thus, this action is practical for providing immunity against financial instability.
2. Opening up to more foreign banks (Option B): While increasing the number of foreign banks might bring in more capital initially, it can also lead to an increase in exposure to global market volatilities. Foreign banks are often channels through which financial crises in other countries can affect the domestic economy. Therefore, this action might increase, rather than decrease, vulnerability to external financial shocks.
3. Maintaining full capital account convertibility (Option C): Full capital account convertibility allows unrestricted movement of capital in and out of the country. While it can enhance financial integration globally, during a crisis, it can lead to rapid capital flights, destabilizing the domestic financial markets. Hence, maintaining full capital account convertibility may not provide immunity in such scenarios.

Based on the evaluation, Option A (not depending on short-term foreign borrowings) is the most strategic action to provide immunity to India's economy during a global financial crisis. Therefore, the correct answer is:

(A) only