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:

The correct answer is 1 only.

To understand why this is the correct option, let us analyze each of the given statements in the context of a global financial crisis:

1. Not depending on short-term foreign borrowings (Correct):
Short-term foreign debt must be repaid or rolled over within a short period (typically less than a year). During a global financial financial crisis, global liquidity dries up, and foreign lenders tend to pull back their capital (risk aversion). If a country depends heavily on short-term foreign debt, it faces a high risk of refinancing/rollover crisis and sudden capital flight. Minimizing dependency on such borrowings helps insulate the domestic economy from sudden external shocks.

2. Opening up to more foreign banks (Incorrect):
Foreign banks operating in India are deeply connected to their parent institutions abroad. During a global financial crisis, parent banks face severe financial stress at home and may repatriate funds or restrict credit supply in host countries like India to shore up their own domestic balance sheets. This can transmit global instability into the Indian banking sector, increasing vulnerability rather than providing immunity.

3. Maintaining full capital account convertibility (Incorrect):
Full capital account convertibility allows local financial assets to be converted into foreign financial assets (and vice versa) freely without any restrictions. During a global financial crisis, panicking foreign and domestic investors would be able to convert and move their capital out of India instantly. This massive capital flight would trigger a severe depreciation of the Indian Rupee, deplete foreign exchange reserves, and destabilize the domestic financial system. Therefore, maintaining capital controls helps shield the economy from volatile global capital flows during crises.