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UPSC Prelims 2020 Paper-1 📅 04 Oct, 2020

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
B
1 and 2 only
C
3 only
D
1, 2 and 3
Result Summary
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APEDIA

UPSC Prelims
2020 • 04 Oct, 2020 • Paper-1
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:
Correct Answer
1 only
Sovereign Debt Protection: Heavy reliance on short-term foreign borrowings makes an economy highly vulnerable to global liquidity shocks and rapid capital fligh......
Ref/Book : UPSC Prelims 2020
Ref. Subject Economy
Chapter -
Ref. Topic Macroeconomics
Pg. No -
💡 Analysis & Explanation
Sovereign Debt Protection ▼
Heavy reliance on short-term foreign borrowings makes an economy highly vulnerable to global liquidity shocks and rapid capital flight during an international crisis. Avoiding such unstable debt acts as a strong protective buffer, making statement 1 a sound defensive strategy.
Contagion Risks ▼
Aggressively opening the domestic market to foreign banks directly increases the interconnectedness with the global financial system, thereby exponentially increasing the risk of importing financial contagion during a worldwide market crash. Statement 2 reduces immunity.
Capital Controls Context ▼
Full capital account convertibility allows the unrestricted, rapid inflow and outflow of foreign capital. In a panic-driven crisis, this can lead to massive and sudden capital exits, severely destabilizing the domestic currency and foreign exchange reserves. Partial convertibility provides necessary regulatory immunity. Statement 3 reduces immunity.
Conclusion ▼
Only abstaining from short-term foreign debt offers genuine macroeconomic immunity.
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