One of the important goals of the economic liberalisation policy is to achieve full convertibility of the Indian rupee. This is being advocated because

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Q: 34 (IAS/1996)
One of the important goals of the economic liberalisation policy is to achieve full convertibility of the Indian rupee. This is being advocated because

question_subject: 

Economics

question_exam: 

IAS

stats: 

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keywords: 

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The correct answer is Option 1: Convertibility of the rupee will stabilize its exchange value against major currencies of the world.

Economic liberalization refers to the opening up of an economy to global trade and investment, reducing government regulations and barriers to international economic transactions. Full convertibility of the Indian rupee is a crucial goal of economic liberalization in India. Let`s explore the reasons behind this goal in detail:

1. Stabilizing Exchange Value: Convertibility of the rupee enables it to be freely traded and exchanged with other currencies in the international market. This allows market forces of supply and demand to determine the value of the currency. When a currency is convertible, its exchange rate is determined by the foreign exchange market, leading to a more stable and market-driven exchange rate. This stability is desirable as it promotes confidence in the currency and reduces uncertainties for businesses, investors, and traders.

2. Attracting Foreign Capital Inflow: Option 2 is partially correct. Full convertibility of the rupee can attract more foreign capital inflow into India. When the rupee is freely convertible, it becomes easier for foreign investors to buy and sell Indian assets, such as stocks, bonds, and real estate. This increased accessibility and liquidity make the Indian market more attractive for foreign investors, leading to an inflow of capital. This capital inflow can help stimulate economic growth, create job opportunities, and foster technological advancements.

3. Promoting Exports: Option 3 is partially correct. Convertibility of the rupee can facilitate the promotion of exports. When the rupee is fully convertible, it becomes easier for exporters to engage in international trade. Convertibility eliminates restrictions and allows exporters to convert their foreign earnings back into the domestic currency without hurdles or significant transaction costs. This ease of conversion enhances export competitiveness and can contribute to increasing India`s export volume.

4. Securing Loans at Attractive Terms: Option 4 is not directly related to convertibility but is more influenced by other factors such as the creditworthiness of the country and its macroeconomic stability. India`s ability to secure loans from world financial markets at attractive terms depends on factors like fiscal discipline, monetary policy, inflation rates, and overall economic performance. While convertibility may indirectly impact the perception of a country`s economic stability, it is not the sole determinant for accessing loans on favorable terms.

In summary, the primary goal of achieving full convertibility of the Indian rupee, as advocated by economic liberalization, is to stabilize its exchange value against major currencies of the world. This stability fosters confidence, facilitates international trade, attracts foreign capital inflow, and promotes overall economic growth.

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