UPSC Prelims 2015 Q34: Indian Economy – External Sector & Balance Of Payments
Convertibility of rupee implies
- (a) being able to convert rupee notes into gold
- (b) allowing the value of rupee to be fixed by market forces
- (c) freely permitting the conversion of rupee to other currencies and vice versa
- (d) developing an international market for currencies in India
Answer: (c) freely permitting the conversion of rupee to other currencies and vice versa
Explanation
Convertibility of the rupee
Convertibility means the rupee can be freely exchanged for foreign currencies, and back, at market rates.
| Type | Meaning | Status in India |
|---|---|---|
| Current account convertibility | For trade in goods and services, remittances | Full, since August 1994 |
| Capital account convertibility | For investment and loans | Partial |
The options checked:
| Option | What it really describes |
|---|---|
| (a) Converting rupee notes into gold | The old gold standard |
| (b) Value of rupee fixed by market forces | A floating exchange rate |
| (c) Freely permitting the conversion of rupee to other currencies and vice versa | Convertibility |
| (d) Developing an international market for currencies in India | A forex market |
The Tarapore Committees (1997 and 2006) laid out a road map for full capital account convertibility.
Answer: (c) freely permitting the conversion of rupee to other currencies and vice versa.
Why each option is right or wrong
- (a) Incorrect. Converting rupee notes into gold was the gold standard, not convertibility.
- (b) Incorrect. A rate fixed by market forces is a floating exchange rate.
- (c) CORRECT. Convertibility is the free conversion of rupee to other currencies and back.
- (d) Incorrect. Developing a market for currencies is not what the term means.
Key point
Rupee convertibility: full on the current account (1994), partial on the capital account; Tarapore Committees recommended a road map.
Remember
Convertibility = free exchange of rupee with other currencies.
Common mistakes
- Confusing convertibility with a floating exchange rate.
- Thinking the rupee is fully convertible on the capital account.
- Forgetting the year of current account convertibility: 1994.
Exam tip
Convertibility = can I exchange it? Float = who sets the price? Two separate ideas.
Sources
- Reserve Bank of India — Report of the Committee on Fuller Capital Account Convertibility (Tarapore Committee, 2006)
- NCERT Class XII — Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics)