The central government repays a loan that it had taken from a foreign…

The correct answer is Option (3) → Capital expenditure will rise, as the repayment reduces its financial liabilities

Repaying a loan reduces a financial liability of the government. Spending that reduces liabilities is capital expenditure.

Option (1) Revenue expenditure will rise, as the payment is made in the current financial year — Incorrect. Paying in the current year does not make it revenue spending. It changes a liability, so it goes to the capital account.

Option (2) Capital receipts will rise, as the government gets back its financial assets — Incorrect. The government pays out money here; nothing comes in.

Option (3) Capital expenditure will rise, as the repayment reduces its financial liabilities — Correct. Reducing a liability is a capital item.

Option (4) Revenue receipts will fall, as the government loses a part of its current income — Incorrect. Repayment is spending. It does not touch taxes or other revenue receipts.