Economics • Indian EconomyHard
In the context of international trade and balance of payments, what does 'Capital Account Convertibility' permit residents to do?
A. Freely convert local financial assets into foreign financial assets and vice versa for investment purposes✓ Correct Answer
B. Convert export earnings into domestic currency at market-determined exchange rates without central bank approval
C. Import essential petroleum and fertilizer commodities using foreign exchange reserves held with commercial banks
D. Settle bilateral trade transactions in local currencies without relying on US dollar invoicing
💡 Solution & Explanation
Capital account convertibility allows residents and non-residents to freely convert domestic currency into foreign financial assets such as equities, bonds, and real estate abroad, facilitating cross-border capital flows. Distractors describe current account transactions like merchandise export earnings or import settlements. India currently maintains partial capital account convertibility under the Tarapore Committee recommendations, with stringent ceilings on outward remittances by individuals. Full convertibility remains a long-term policy goal contingent upon robust macroeconomic stability indicators.
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