UPSC Prelims 2015 GS Paper I · Q34 of 100 Economy easy

Convertibility of rupee implies

  1. (a) being able to convert rupee notes into gold
  2. (b) allowing the value of rupee to be fixed by market forces
  3. (c) freely permitting the conversion of rupee to other currencies and vice versa ✓ UPSC's answer
  4. (d) developing an international market for currencies in India

Why the answer is (c)

• Currency convertibility means the freedom to exchange the domestic currency for foreign currencies (and vice versa) at market rates without restrictions — option (c).

• India adopted current-account convertibility in 1994 (Article VIII of the IMF); capital-account convertibility remains partial, as recommended in stages by the Tarapore Committees.

• Conversion to gold (a) is the old gold standard; a market-determined exchange rate (b) is 'floating', a related but distinct concept; (d) describes a forex market.

• Hence option (c).

Why the other options are wrong

(a) being able to convert rupee notes into gold
Gold conversion is the gold standard, not convertibility.
(b) allowing the value of rupee to be fixed by market forces
Market-determined value is a floating rate, not convertibility.
(d) developing an international market for currencies in India
Developing a currency market is not what convertibility means.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2015, held on 23 August 2015. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

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