Detailed Explanation:

Answer: Option 1 — 1 only

During a global financial crisis, India's primary shield against external shocks is reducing dependence on short-term foreign borrowings, which minimizes vulnerability to sudden capital flight and currency instability. The other two measures would actually increase systemic risk rather than provide immunity.

✅ Statement 1 – Correct: Limiting short-term foreign borrowings reduces exposure to capital flight; when foreign investors withdraw funds during a crisis, economies with lower short-term external debt face less rupee depreciation and financial instability.

❌ Statement 2 – Incorrect: Opening up to more foreign banks increases reliance on foreign capital and credit; during a crisis, foreign banks typically restrict lending, amplifying credit contraction and economic damage in the host economy.

❌ Statement 3 – Incorrect: Full capital account convertibility permits unrestricted outflow of foreign capital; this accelerates capital flight during crises, causing sharp currency depreciation and financial sector stress, making the economy more vulnerable rather than immune.

📝 Short Notes: Capital Account Management and Financial Stability

• Capital Account Convertibility: Allows free movement of capital across borders. India has partial convertibility on the capital account, maintaining restrictions on short-term speculative flows to manage systemic risk.
• Short-term Foreign Debt Risk: Creates currency mismatch and rollover risk; during crises, maturity mismatches force rapid repayment, depleting foreign reserves and destabilizing the exchange rate.
• Foreign Direct Investment vs. Foreign Portfolio Investment: FDI (long-term, stable) is preferred over FPI (short-term, volatile); foreign banks' presence increases FPI dependency and pro-cyclical credit behavior during downturns.
• Debt Sustainability Framework: Countries with lower short-term external debt as a percentage of foreign reserves and lower debt-to-GDP ratios demonstrate greater resilience to external shocks.