UPSC Prelims 2002 Q137: Indian Economy – External Sector & Balance Of Payments
Consider the following statements: Full convertibility of the rupee may mean
1. Its free float with other international currencies.
2. Its direct exchange with any other international currency at any prescribed place inside and
outside the country.
3. It acts just like any other international currency.
Which of these statements are correct?
- (a) 1 and 2
- (b) 1 and 3
- (c) 2 and 3
- (d) 1, 2 and 3
Answer: (d) 1, 2 and 3
Explanation
What full convertibility of the rupee may mean
| Statement | Verdict |
|---|---|
| 1. Free float with other international currencies | True — the rate is set by the market |
| 2. Direct exchange with any other currency at any place inside and outside the country | True |
| 3. The rupee acts just like any other international currency | True |
| Combination | All three statements |
Full convertibility (on both current and capital accounts) means the rupee can be freely exchanged for any foreign currency at any place, its value floats against other currencies, and it behaves like any other international currency. So the answer is 1, 2 and 3.
Answer: (d) 1, 2 and 3.
Why each option is right or wrong
- (a) Incorrect. It leaves out statement 3, which is also true.
- (b) Incorrect. It leaves out statement 2, which is also true.
- (c) Incorrect. It leaves out statement 1, which is also true.
- (d) CORRECT. All three describe full convertibility.
Key point
India: current account convertibility since 1994; capital account convertibility only partial (Tarapore Committee 1997, 2006).
Remember
Full convertibility = current plus capital account convertibility.
Common mistakes
- Thinking current account convertibility is the same as full convertibility.
- Dropping the free-float idea from full convertibility.
- Doubting that a convertible currency acts like other international currencies.
Exam tip
All three are features of a freely convertible currency.
Sources
- RBI — Report of the Committee on Capital Account Convertibility
- Ramesh Singh — Indian Economy