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. Correct. If the US Federal Reserve tightens monetary policy, US interest rates rise and global investors may pull money out of emerging markets and move it to safer/higher-yield US assets; this can cause capital flight.

2. Correct. Capital flight puts pressure on the domestic currency to depreciate. Firms with existing ECBs then need more domestic currency to service the same foreign-currency debt, raising their effective interest/payment burden.

3. Incorrect. Devaluation/depreciation increases, not decreases, the currency risk of ECBs because repayment of foreign debt becomes costlier in domestic-currency terms.

Hence, statements 1 and 2 only are correct.