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?

The correct answer is Option 4 (1, 2, and 3). Full convertibility of the rupee, also known as Capital Account Convertibility, implies the freedom to convert domestic currency into foreign currency and vice versa at market-determined rates for any purpose.

• Statement 1 is correct: It signifies a free float, where the exchange rate is determined by market forces of demand and supply without central bank intervention.
• Statement 2 is correct: It allows for the unrestricted exchange of the rupee with any foreign currency at any location, both domestically and globally, removing all capital controls.
• Statement 3 is correct: Upon achieving full convertibility, the rupee would function like hard currencies (e.g., USD, Euro), serving as a reliable medium of exchange and store of value in international transactions.

Currently, the rupee is fully convertible on the Current Account but only partially on the Capital Account. Full convertibility integrates the domestic economy completely with global financial markets.