Convertibility And Capital Account

Rupee convertibility means the system where any amount of rupee can be converted into any other currency without any question asked about the purpose for which the foreign exchange is to be used. Non-convertibility can generally be defined with reference to the transaction for which foreign exchange cannot be legally purchased (e.g., import of consumer goods etc), or transactions which are controlled and approved on a case-by-case basis (like regulated imports etc).

**Not depending on short-term foreign borrowings:** This reduces exposure to capital flight. During a crisis, foreign investors may pull their money out of emerging markets like India, leading to rupee depreciation and financial instability. By limiting short-term foreign borrowings, India can lessen the impact of such capital flight. **Opening up to more foreign banks:** While this might seem beneficial, it can also increase reliance on foreign capital. During a crisis, foreign banks might be more likely to restrict credit, negatively impacting the Indian economy. **Maintaining full capital account convertibility:** This allows for the free movement of capital in and out of the country. While it can be beneficial in normal times, it can also exacerbate capital flight during a crisis. Therefore, the most prudent strategy is to reduce dependence on short-term foreign borrowings to minimize the vulnerability caused by potential capital flight. Hence, only statement 1 is correct. Hence, option A is the correct answer.