Correct Option (B)
Full convertibility of the Indian rupee, particularly on the capital account, implies that the rupee can be freely exchanged into foreign currency and vice versa for all capital transactions, including foreign direct investment and portfolio investment. This policy is advocated primarily because it enhances investor confidence and facilitates the free inflow and outflow of capital. By removing restrictions on capital movements, India becomes a more attractive destination for foreign investors, leading to increased foreign capital inflow. This integration with global financial markets is a key objective of economic liberalisation.
Incorrect Options
Option 1: Convertibility of the rupee does not automatically guarantee stability of its exchange value. Exchange rates are influenced by a multitude of factors, including market demand and supply, interest rate differentials, inflation, economic growth, and geopolitical events. While convertibility allows market forces to determine the exchange rate, it does not inherently stabilize it.
Option 3: While full convertibility can indirectly support export promotion by simplifying international transactions and potentially making Indian goods more competitive if the rupee depreciates, it is not the primary or most direct reason for advocating full convertibility as a goal of economic liberalisation. The direct impact on foreign capital inflow is considered a more significant and immediate objective.
Option 4: India's ability to secure loans from world financial markets at attractive terms depends primarily on its creditworthiness, macroeconomic stability, sovereign ratings, and global liquidity conditions, rather than solely on full rupee convertibility. India has historically accessed international financial markets for borrowing without achieving full capital account convertibility.