GyanGramConsider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital fligh…
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Consider the following statements:
1. Tight monetary policy of US Federal Reserve could lead to capital flight.
2. Capital flight may increase 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?
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• Correct Answer: B
• US Fed tightening raises US yields, triggering capital flight from emerging markets.
• Capital flight and currency depreciation increase domestic-currency cost of servicing ECBs.
• Devaluation raises, not lowers, currency risk for foreign-currency debt.
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