UPSC Previous Year Question | Prelims GS | 2022

Consider the following statements: 1. US Federal Reserve's tight monetary policy could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBs. Which of the statements given above are correct?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Answer

Correct Answer

1 and 2 only

Explanation

Statements 1 and 2 are correct — tight US monetary policy triggers capital flight, which raises borrowing/interest costs for firms with ECBs. Statement 3 is incorrect — devaluation of the domestic currency actually increases (not decreases) the currency risk for ECB repayments, since more rupees are needed to repay foreign-currency debt.

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