Consider the following statements:India has adopted the economic policy of Full Current Account convertibility.India is yet to adopt full Capital Account convertibility policy.Adoption of full Convertibility on Capital Account may enhance the danger of economic instability during global financial crisis.Which of the statements given above is/are correct?
Question
Consider the following statements:India has adopted the economic policy of Full Current Account convertibility.India is yet to adopt full Capital Account convertibility policy.Adoption of full Convertibility on Capital Account may enhance the danger of economic instability during global financial crisis.Which of the statements given above is/are correct?
Solution
The correct statements are:
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India has not adopted the economic policy of Full Current Account convertibility. The Indian Rupee is partially convertible on the current account. This means that while most of the transactions in goods, services and income can be carried out without restriction, there are restrictions on certain types of capital account transactions.
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India is yet to adopt full Capital Account convertibility policy. This is correct. Capital Account Convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa. It is associated with changes of ownership in foreign or domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by the rest of the world, on the country's real and financial assets and liabilities.
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Adoption of full Convertibility on Capital Account may enhance the danger of economic instability during global financial crisis. This is also correct. Full capital account convertibility can lead to increased vulnerability to external economic shocks and volatility in capital flows. During a global financial crisis, this could potentially lead to economic instability.
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