Foreign borrowings include the money borrowed by a government or private corporations from another country’s government, global institutions or private lenders. Short term borrowing can put undue pressure on the balance of payments of a country at a time when the global financial crisis (GFC) has already hit the forex reserve income. Therefore, a lower or nil short-term foreign debt is advantageous in times of GFC.
Opening up of foreign banks during a Global Financial Crisis (GFC) could expose the domestic economy to the externalities of the global market. Furthermore, while foreign banks can lower the cost of financial services and reduce solvency risks, they also increase credit risk and the potential for capital flow volatility. This volatility may further damage the domestic financial market in times of GFC due to its exposure to foreign banks.
Maintaining full capital account convertibility is not likely to give immunity to India from the global financial crisis. Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges. Capital account convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice-versa. Currently, there are limitations to how much capital can flow in and out of India. So, India’s capital account is only partially convertible. A full capital account convertibility in times of a GFC would lead to an unrestricted outflow of capital.