Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q59 (IAS/2020) Economy › External Sector & Trade › Currency convertibility regimes Official Key

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:

Result
Your answer: —  ·  Correct: A
Explanation

The correct answer is Option 1 (1 only). In the context of a global financial crisis, the following reasoning explains why Statement 1 provides immunity while others increase vulnerability:

  • Statement 1 is correct: Short-term foreign borrowings (External Commercial Borrowings) are highly volatile. During a global crisis, foreign lenders often withdraw capital quickly ("flight to safety"), leading to a liquidity crunch and currency depreciation. Reducing dependence on these loans ensures better macro-economic stability.
  • Statement 2 is incorrect: Opening up to more foreign banks increases financial contagion. If parent banks in developed nations face a crisis, their Indian subsidiaries may restrict lending or pull out capital, transmitting the global shock directly into the domestic economy.
  • Statement 3 is incorrect: Full Capital Account Convertibility allows local and foreign investors to move unlimited money in and out of the country. During a crisis, this could trigger massive capital flight, crashing the Rupee and depleting foreign exchange reserves.

Thus, only cautious debt management (Statement 1) offers a protective buffer against external shocks.

How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
54%
got it right
PROVENANCE & STUDY PATTERN
Guest preview
Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immun…
At a glance
Origin: Books + Current Affairs Fairness: Low / Borderline fairness Books / CA: 3.3/10 · 6.7/10
You're seeing a guest preview. The Verdict and first statement analysis are open. Login with Google to unlock all tabs.

This is a classic 'Conceptual Application' question. It doesn't ask for data but tests your grasp of the 'Stability vs. Exposure' trade-off in the External Sector. If you understood why India survived the 1997 and 2008 crises (limited exposure), this was a sitter.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Is reducing India's dependence on short-term foreign borrowings likely to increase India's resilience to or immunity from a future global financial crisis?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > RESERVE ADEQUACY FEW MONTHS OF IMPORTS RULE VERSUS GUIDOTTI-GREENSPAN RULE > p. 497
Presence: 5/5
“RESERVE ADEQUACY: FEW MONTHS OF IMPORTS RULE VERSUS GUIDOTTI-GREENSPAN RULE • Traditionally, an adequate amount of forex reserve was determined in terms of reserves equivalent for few months of imports. However, with increasing importance of capital account transactions in BOP, this approach is now becoming less relevant.• Short-term external debt among various capital account transactions has gained prominence now under BOP.• Thus, the ratio of short-term debt to forex reserves has emerged as a relevant yardstick to determine reserve adequacy. Component-wise Indian forex reserves - explained in the previous chapter. 110000 India's Forex reserves cover of imports as on June ø 2020 was 14.8 months.”
Why this source?
  • Identifies short-term external debt as a prominent capital-account item and makes the short-term debt / forex reserves ratio a relevant yardstick for reserve adequacy.
  • Implicates that high short-term debt relative to reserves reduces a country's buffer against external shocks, so reducing it would improve resilience.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Limitations > p. 499
Presence: 4/5
“• It exposes the economy to global vulnerabilities. \bullet• There remains a fear of sudden capital flight which may also lead to increase in current account deficit.\bullet Risk of speculative attacks.\bullet No ceiling on external debt may be disastrous.\bullet Zontagion effect, i.e., more chances of transmission of the effect of financial crisis occurring in a particular country to the Indian economy. As per the Tarapore Committee, there are some pre-conditions which need to be fulfilled before going for full convertibility of rupee: • 1. Reduce fiscal deficit to 3.5 per cent of GDP. • 2. Reduce public debt by setting up consolidated sinking fund. • 3.”
Why this source?
  • Specifically links external exposure to global vulnerabilities such as sudden capital flight and contagion (transmission of foreign financial crises).
  • Reducing short-term foreign borrowings would directly lower the risk vectors named (capital flight, speculative attacks, contagion).
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
Presence: 4/5
“2022, external debt of India was $610.5 Billion (19.2% of GDP). $610.5 billion = 19.2% of GDP "Sovereign Debt" | "Non-Sovereign Debt" • $124.5 billion (3.9% of GDP) | $486 billion (15.3% of GDP) • Sovereign Debt is also called Govt. of India | It includes • (external) Debt • (State Govt. external debt is in the name of |  Commercial Borrowing • GoI only) |  External Commercial Borrowing ECB • plus FII investments in Indian • It includes | corporate bonds FPI/FII investments in G-securities Loans under Bilateral Assistance |  NRI Deposits Loans under Multilateral Assistance • India's external debt can also be classified as 'short-term' (21.6%) and long-term debt.• Commercial borrowings remained the largest component of external debt followed by non-resident deposits.• Currency wise, India's external debt includes: • o US Dollar denominated (55.5%)• o Indian Rupee denominated (30%)• o And then some is SDR, Yen, Euro.”
Why this source?
  • Provides the quantitative context: short-term debt is a significant component of India's external debt (21.6%), so changes in this component materially affect overall external vulnerability.
  • Lists composition and currency shares of external debt, underscoring why short-term and dollar-denominated liabilities matter for crisis exposure.
Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

How to study

This tab shows concrete study steps: what to underline in books, how to map current affairs, and how to prepare for similar questions.

Login with Google to unlock study guidance.

Micro-concepts

Discover the small, exam-centric ideas hidden in this question and where they appear in your books and notes.

Login with Google to unlock micro-concepts.

The Vault

Access hidden traps, elimination shortcuts, and Mains connections that give you an edge on every question.

Login with Google to unlock The Vault.

✓ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS · 2018 · Q59 Relevance score: 8.16

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:

CDS-II · 2011 · Q84 Relevance score: -0.77

A recent survey (by Bloomberg) shows that the USA has fallen behind emerging markets in Brazil, China and India as the preferred place to invest. Why is-it so ? 1. Unstable economic situation of the USA which the global investors feel not likely to improve in the near future. 2. Global investors are finding Brazil, China and India to be actually more amenable to foreign investment. Select the correct answer using the code given below :

IAS · 2017 · Q81 Relevance score: -2.86

What is/are the most likely advantages of implementing 'Goods and Services Tax (GST)' ? 1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India. 2. It will drastically reduce the 'Current Account Deficit' of India and will enable it to increase its foreign exchange reserves. 3. It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future. Select the correct answer using the code given below :

IAS · 2015 · Q22 Relevance score: -4.33

When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

IAS · 2019 · Q65 Relevance score: -4.62

In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis? 1. The foreign currency earnings of India's IT sector 2. Increasing the government expenditure 3. Remittances from Indians abroad Select the correct answer using the code given below.