Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital…
Consider the following statements: 1. Tight monetary policy of US Federal Reserve 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 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Solution
This was the dropped question (UPSC marked 'X'). Coaching consensus: 1 correct (Fed tightening induces capital flight), 2 correct (higher rates raise ECB costs), 3 incorrect (devaluation increases currency risk for ECBs).