UPSC Prelims 2015 · Question 34 of 98
UPSC Prelims 2015 question on Rupee Convertibility
- ExamUPSC CSE
- Year2015
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicExternal Sector of India
- DifficultyMedium
- TypeDirect
Convertibility of rupee implies
Show answer
Answer: C. freely permitting the conversion of rupee to other currencies and vice versa
Verdict
The answer is freely permitting the conversion of rupee to other currencies and vice versa. That is what convertibility means.
Analysis
Convertibility is the ease with which a country's currency can be exchanged for another. India permits full convertibility on the current account and partial convertibility on the capital account, which is the distinction most questions in this area test. Conversion into gold describes the gold standard, abandoned decades ago. Allowing the value to be fixed by market forces describes a floating exchange rate, which is a separate concept and can exist with or without full convertibility. Developing an international currency market in India describes market infrastructure, not the property of the currency itself.
Source
Investopedia entry on convertibility.
How to crack it
Keep convertibility and exchange rate regime strictly apart, because they are the two ideas UPSC most often merges into a distractor. Convertibility is about permission to exchange, the exchange rate regime is about how the price is set. Then add the current account against capital account layer, and you have the whole topic. Ask of any option, is this about permission or about price, and the correct one identifies itself.