Question
Q9. 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
Answer: A
Detailed Explanation
• Less exposure to foreign financial markets will likely give India some insulation if a future global financial crisis occurs.
• Debt commitments that must be paid off either within the next 12 months or the current fiscal year of a corporation are referred to as short-term debt.
• Current liabilities are another name for short-term debt. So, it would be challenging to pay back the debt amid
a worldwide financial crisis.
• Opening up to additional international banks would increase the risk due to the greater exposure to the global economy.
• Capital account convertibility is a feature of a nation’s financial regime that centers on the ability to conduct transactions of local financial assets into foreign financial assets freely or at market determined exchange rates. It is sometimes referred to as capital asset liberation or CAC.
Disadvantages of CAC
• High Volatility
• Foreign Debt Burden
• Effects on Balance of Trade and Exports
• Capital flight
