Q. Convertibility of rupee implies:

• being able to convert rupee notes into gold
• allowing the value of rupee to be fixed by market forces
• freely permitting the conversion of rupee to other currencies and vice versa
• developing an international market for currencies in India

Answer: (c) freely permitting the conversion of rupee to other currencies and vice versa

Notes:

• Convertibility of rupee means freely permitting the conversion of rupee to other currencies and vice versa.
• Indian currency is fully convertible in the Current Account and partially convertible in the Capital Account.
  • Current Account convertibility means freedom to convert domestic currency into foreign currency and vice-versa, for trade in goods and services.
  • On the other hand, Capital Account convertibility means freedom of currency conversion related to capital inflows and outflows.

Convertibility of Currency

• Prior to the First World War the whole world was having gold standard under which the currency in circulation was allowed to get converted either in gold or other currencies based on the gold standard. 
• But after the failure of Bretton woods system in 1971 this system changed. Presently convertibility of money implies a system where a country’s currency becomes convertible in foreign exchange and vice versa.
• After the collapse of Breton Woods’s system in 1971, the various countries switched over to the floating foreign exchange rate system. Under the floating or flexible exchange rate system, exchange rates between different national currencies are allowed to be determined through market demand for and supply of the same.
• Since 1994, Indian rupee has been made fully convertible in current account transactions.