UPSC CSE Prelims
Question 12
Consider the following statements:
- Tight monetary policy of US Federal Reserve could lead to capital flight.
- Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
- Devaluation of domestic currency decreases the currency risk associated with ECBs.
Which of the statements given above are correct?
View correct answer and explanation
Correct answer: A
Correct Option: A (1 and 2 only)
Explanation: US monetary tightening can draw funds toward dollar assets, raise borrowing costs and worsen rupee liabilities; depreciation does not remove foreign-currency risk.
Statement / Pair / Item-wise Analysis:
1. True / qualifies - Higher US rates can induce portfolio outflows from emerging markets.
2. True / qualifies - Capital flight can increase funding spreads/interest costs for Indian borrowers relying on ECBs.
3. False / does not qualify - Depreciation raises the domestic-currency cost of servicing foreign-currency loans, increasing rather than decreasing currency risk.
Option-wise Analysis:
A. Correct-selects exactly the correct statements/items identified above.
B. Incorrect-includes 3 even though Depreciation raises the domestic-currency cost of servicing foreign-currency loans, increasing rather than decreasing currency risk.; omits 1 even though Higher US rates can induce portfolio outflows from emerging markets.
C. Incorrect-includes 3 even though Depreciation raises the domestic-currency cost of servicing foreign-currency loans, increasing rather than decreasing currency risk.; omits 2 even though Capital flight can increase funding spreads/interest costs for Indian borrowers relying on ECBs.
D. Incorrect-includes 3 even though Depreciation raises the domestic-currency cost of servicing foreign-currency loans, increasing rather than decreasing currency risk.