Civil Services Prep

Prelims 2015 · Economy · Question 34

Convertibility of rupee implies

  1. being able to convert rupee notes into gold
  2. allowing the value of rupee to be fixed by market forces
  3. freely permitting the conversion of rupee to other currencies and vice versa
  4. developing an international market for currencies in India

Answer

freely permitting the conversion of rupee to other currencies and vice versa

  • (a) Convertibility does not mean exchanging rupee notes for gold. That is linked to the old gold standard, not modern currency convertibility. Verdict: Incorrect.
  • (b) A market-determined exchange rate is about the exchange rate regime, not the meaning of convertibility itself. Verdict: Incorrect.
  • (c) Convertibility means the freedom to convert domestic currency into foreign currencies and vice versa, subject to the extent of convertibility allowed. Verdict: Correct.
  • (d) An international currency market in India may be related to financial development, but it is not the definition of rupee convertibility. Verdict: Incorrect.
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