Consider the following statements regarding current account convertibility:
1. A currency with current account convertibility can be converted to any foreign currency at existing market rates.
2. It can include free movement of Foreign direct investments in domestic projects.
3. As of 2024, the Indian rupee is current account convertible.
How many of the statements given above are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Explanation Statement 1 is correct: A currency with current account convertibility can be converted to any foreign currency at existing market rates for trade purposes for any amount. This allows for easy financial transactions for the export and import of goods and services. Any individual involved in trade can get foreign currency converted at designated banks or dealers. In essence, current account convertibility remains within the institutional trading realms.
Statement 2 is not correct: Free movement of Foreign Direct Investments (FDI) is a key aspect of capital account convertibility, not current account convertibility. Capital account convertibility allows for the free flow of capital for investment and other financial transactions, while current account convertibility relates to trade in goods and services.
Statement 3 is correct: When currency reforms were enacted at the end of the 20th century, the rupee was made partially convertible for goods, services, and merchandise only. During the mid-1990s, the rupee was fully made current account convertible for all trading activities, remittances, and indivisibles. As of 2024, the rupee is current account convertible.
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