UPSC Prelims 1996 · General Studies

Question 34: Economy and Social Development

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

aconvertibility of the rupee will stabilize its exchange value against major currencies of the world

bit will attract more foreign capital inflow in India

cit will help promote exports

dit will help India secure loans from the world financial markets at attractive terms

AnswerThe answer is (c).

A rupee that is convertible at a market-determined rate is argued to help exports: exporters can use their earnings freely, and the exchange rate no longer taxes them by staying overvalued. Convertibility does not itself stabilise the rate (it can make it more volatile), and capital inflows and loan terms depend on much more than the exchange regime. Remember: market rate plus convertibility favours exporters.

Why each option is right or wrong

(a) A freely convertible rate moves with the market and can be more volatile, not more stable.
(b) Foreign capital depends on returns and confidence; convertibility is not the reason the key gives.
(c) Right: a market-linked, convertible rupee is expected to promote exports.
(d) Loan terms depend on creditworthiness and conditions, not convertibility alone.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 1996, General Studies. UPSC's own paper isn't online; the words are from a published compilation. The paper on upsc.gov.in.