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NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis

A persistent current account deficit financed by volatile short-term capital inflows makes a country most vulnerable to which of these?

The country becomes vulnerable to sudden capital outflows that can cause currency depreciation. Volatile short-term flows can reverse quickly when sentiment changes, straining reserves. It does not lead to appreciation or remove the need for foreign exchange reserves.

  1. ASudden capital outflows causing currency depreciationCorrect
  2. BAutomatic appreciation of the currency
  3. CA guaranteed fall in imports
  4. DElimination of the need for foreign exchange reserves

Explanation

Reliance on short-term flows means that if investor sentiment turns, outflows can occur suddenly, pressuring the currency and reserves. It does not cause appreciation or reduce the need for reserves.

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