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Q34 (IAS/2015) Economy › External Sector & Trade › Currency convertibility regimes Official Key

Convertibility of rupee implies

Result
Your answer: —  ·  Correct: C
Explanation

Convertibility means that the currency of a country can be freely converted into a foreign exchange at market-determined exchange rate.[1] More specifically, convertibility of rupee means that those who have foreign exchange (e.g. US Dollars and Pound Sterling) can get them converted into rupee and vice versa at the market-determined rate of exchange.[2] This directly corresponds to option C, which states that convertibility implies freely permitting the conversion of rupee to other currencies and vice versa.

Option A is incorrect as convertibility does not relate to converting currency notes into gold. Option B is misleading because while convertibility does involve market-determined rates, the core concept is about the freedom to convert between currencies, not merely about market-determined exchange rates. Option D is incorrect as convertibility is about the ability to exchange currencies, not specifically about developing an international currency market within India. As of 2024, the Indian rupee is current account convertible but not capital account convertible[3], meaning convertibility exists with certain limitations on capital account transactions.

Sources
  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CONVERTIBILITY OF INDIAN RUPEE > p. 498
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CONVERTIBILITY OF INDIAN RUPEE > p. 498
  3. [3] https://www.investopedia.com/articles/forex/083115/pros-and-cons-fully-convertible-rupee.asp
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Convertibility of rupee implies [A] being able to convert rupee notes into gold [B] allowing the value of rupee to be fixed by market f…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10
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This is a fundamental 'Definition' question found in every standard Economy text (NCERT/Vivek Singh). It tests conceptual precision: distinguishing the 'permission to convert' (Convertibility) from the 'pricing mechanism' (Floating Rate). If you missed this, your basics on the External Sector are shaky.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Does convertibility of the Indian rupee imply the ability to convert rupee notes into gold?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"Current account convertibility means freedom to convert domestic currency into foreign currency and vice versa for trade in goods and invisibles (services, transfers or income from investment)."
Why this source?
  • Defines current account convertibility as freedom to convert domestic currency into foreign currency and vice versa for trade in goods and invisibles.
  • This definition frames convertibility in terms of foreign currencies and trade transactions, not conversion of notes into gold.
Web source
Presence: 5/5
"Indian rupee is now fully convertible in any foreign currency for the current account transactions."
Why this source?
  • States that the Indian rupee is now fully convertible in any foreign currency for current account transactions.
  • Explains capital account convertibility as freedom to convert the rupee into specified foreign currencies (examples given), indicating convertibility concerns foreign currencies rather than gold.
Web source
Presence: 3/5
"The Indian Rupee was pegged to the US Dollar (and Gold under the Gold Standard)."
Why this source?
  • Notes historically the rupee was pegged to the US Dollar (and Gold under the Gold Standard).
  • This indicates a historical link to gold under the Gold Standard, distinguishing past arrangements from modern definitions of convertibility into foreign currency.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CONVERTIBILITY OF INDIAN RUPEE > p. 498
Strength: 5/5
“• Convertibility means that the currency of a country can be freely converted into a foreign exchange at market-determined exchange rate. • For example, convertibility of rupee means that those who have foreign exchange (e.g. US Dollars and Pound Sterling) can get them converted into rupee and vice versa at the market-determined rate of exchange. • Convertibility is of two types: on current account and on capital account.”
Why relevant

Gives a clear definitional rule: convertibility is described as conversion of a currency into foreign exchange/currencies at a market rate.

How to extend

A student could contrast this definition with the idea of converting notes to gold and note that convertibility here targets foreign currency markets, not gold redemption.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Current Account Convertibility: > p. 109
Strength: 4/5
“• RBI allows full conversion of Rupee into foreign currencies and foreign currencies into Rupee (at market price i.e., Nominal Exchange Rate) for any transactions under current account of BoP. This is called "rupee is fully convertible at current account".• So, suppose someone wants to import commodities worth $10 billion in India then RBI will convert that many Rupees into $10 billion without any restriction for import purpose. As a part of the economic reforms initiated in 1991 rupee was made fully convertible at current account in 1993.”
Why relevant

Explains 'current account convertibility' as RBI allowing full conversion between rupee and foreign currencies for current-account transactions.

How to extend

One can extend this to test whether 'convertibility' is limited to foreign currencies (supporting that gold conversion is not implied) by checking whether gold appears in the listed allowed conversions.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.1 Introduction > p. 38
Strength: 4/5
“RBI used to issue the paper slips without the deposition of physical gold (but by keeping some other assets). So, if the production of goods and services (i.e., the output) is increasing in the economy, then RBI can issue more Rupee currency notes (by accepting some other assets like government securities, foreign currency) to facilitate transaction in the economy. The logic is if RBI is issuing the currency notes, then it must be backed by some asset physical or financial (may not necessarily gold). Now we have a huge population and if all the people are going to transact with RBI asking for Rupee notes or deposition of gold then it will be very difficult for RBI to manage them.”
Why relevant

States RBI issues paper currency without deposition of physical gold and that notes may be backed by other assets, implying currency is not necessarily redeemable for gold.

How to extend

Combine this with the definition of convertibility to infer that convertibility need not imply a gold redemption right unless the legal framework specifies so.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.10 Money Supply > p. 54
Strength: 4/5
“The One Rupee note is signed by the finance secretary (and printed by Govt.) as a testimony that it is the base unit of the currency system. Coins and One Rupee note are minted/printed by the government of India and hence constitute the liability of Government of India. As part of the circulation process, RBI buys the one rupee note and minted coins from the Government of India and hence the coins and one rupee note come and sit under the asset section of RBI's balance sheet. All banknotes (except one rupee note) issued by RBI are backed by assets such as gold, Government Securities and Foreign Currency Assets, as defined in Section 33 of RBI Act, 1934.”
Why relevant

Notes that RBI-issued banknotes are backed by assets such as gold, government securities and foreign currency assets per the RBI Act.

How to extend

A student could use this to argue that 'backing by gold' is not the same as a legal convertibility (redeemability) into gold—one should check whether backing equals redemption rights.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2020 > p. 488
Strength: 3/5
“16.20 Indian Economy Select the correct answer using the code given below: • (a) 1 and 2 only • (b) 2 and 4 only • (c) 3 only (d) 1, 3 and 4 only • 1. Most of India's external debt is owned by government entities. • 2. All of India's external debt is denominated in US dollars. Which of the statements above is/are correct? (a) 1 only • (b) 2 only• (c) Both 1 and 2 (d) Neither 1 nor 2 No question \parallel 2015 • 3. 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.”
Why relevant

Includes a multiple-choice question that explicitly lists 'being able to convert rupee notes into gold' as a possible meaning of convertibility, indicating this is a common alternative/misconception.

How to extend

This suggests testing official definitions (as in snippet 2) to confirm which option matches standard use and to rule out the gold-conversion interpretation.

Statement analysis

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Statement analysis

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Statement analysis

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SIMILAR QUESTIONS

IAS · 1994 · Q27 Relevance score: 8.02

Convertibility of the rupee implies

IAS · 1998 · Q93 Relevance score: 2.77

Capital Account Convertibility of the Indian Rupee implies

IAS · 1996 · Q34 Relevance score: 1.42

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

IAS · 2002 · Q137 Relevance score: 0.40

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?

CAPF · 2013 · Q97 Relevance score: -0.27

Which of the following statements is correct with respect to the convertibility of Indian rupee?