During liberalisation, RBI made rupee full convertible in which account?

Question

Accepted Answer

The correct option is 2:

During the process of economic liberalization in India, which began in 1991, one of the major steps towards integrating the Indian economy with the global financial system was increasing the convertibility of the rupee. The Capital Account deals with all transactions that create assets or liabilities abroad, such as Foreign Direct Investment (FDI), Foreign Institutional Investment (FII), loans, and movement of capital by residents. The stated intent behind moving towards full convertibility on the Capital Account was to facilitate freer flows of international capital, which can spur investment, reduce the cost of capital, and improve the efficiency of the domestic financial system. While the current account was made fully convertible in 1994, the liberalization push aimed at making the capital account fully convertible to enable Indian residents and corporations to freely transact assets and liabilities with the rest of the world, thereby completing the integration process.

The incorrect option is 1 (Trade account):
The Trade account is a component of the Current Account, which primarily deals with imports and exports of goods and services (current transactions). India achieved full convertibility on the Current Account (including the Trade Account) in 1994, which means it was convertible *before* the capital account was considered for full convertibility.

The incorrect option is 3 (IMF account):
The IMF (International Monetary Fund) is an international financial institution that provides financial assistance and surveillance to member countries. The concept of rupee convertibility applies to a country’s balance of payments accounts (Current and Capital accounts), not to an account held directly with the IMF.

The incorrect option is 4 (World bank account):
The World Bank is a development organization that provides loans and aid. Similar to the IMF, the concept of convertibility of the domestic currency (rupee) is related to the country's balance of payments structure and monetary policy, not to a specific institutional account held with the World Bank.