Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest 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?

Option (a) is correct because a tight US monetary policy raises interest rates, triggering capital flight from emerging markets as investors seek higher returns in the US, which depreciates the Rupee and increases the cost of servicing dollar-denominated External Commercial Borrowings (ECBs). Statement 3 is incorrect because the devaluation of the domestic currency increases currency risk by requiring more local currency to repay the same amount of foreign debt, making option (d) the most tempting but wrong choice. The core concept tested is the impact of global interest rate cycles on capital flows and the exchange rate sensitivity of external debt.