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?

1. Statement 1: A tight monetary policy by the US Federal Reserve typically involves increasing interest rates, making US assets more attractive. This can lead to investors withdrawing funds from emerging markets like India, resulting in capital flight. This statement is generally considered correct. 2. Statement 2: Capital flight exerts downward pressure on the domestic currency. For Indian firms with External Commercial Borrowings (ECBs) denominated in foreign currency, a weaker domestic currency increases the amount of domestic currency needed to service the debt (interest and principal payments), thereby increasing the effective interest cost and overall borrowing cost. This statement is generally considered correct. 3. Statement 3: Devaluation or depreciation of the domestic currency *increases* the currency risk for entities holding ECBs denominated in foreign currency, as more domestic currency is required to meet the foreign currency obligations. The statement claims it decreases the risk, which is incorrect. 4. Note: Based on the analysis, statements 1 and 2 appear correct, suggesting option (A). However, the official UPSC answer key marked this question as 'X' (cancelled), indicating potential ambiguity or dispute regarding the statements or options.