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    Question

    If India adopted full currency convertibility without

    any limitations, which of the situations given below would see considerable increase with respect to Indian market? 1. Easy Movement of Foreign Portfolio Investments 2. Increase the Non-Performing Assets. 3. Avoidance of Profit shifting. 4. Currency volatility Risks. Select the correct answer using the codes given below:
    A 1, 2, and 3 only Correct Answer Incorrect Answer
    B 2, 3, and 4 only Correct Answer Incorrect Answer
    C 1, 3, and 4 only Correct Answer Incorrect Answer
    D 1, 2, and 4 only Correct Answer Incorrect Answer

    Solution

    Option is C correct: Allowing full currency convertibility in both the Capital Account and Current Account would Ensure easy movement of the Foreign Portfolio Investments in the Indian market. They would invest during the periods of growth while withdrawing by immediately converting their assets during the periods of slowdown. This ease of investment and withdrawal depending upon the economic situation of a country can cause fluctuations in its exchange rates and would increase the problems of volatility witnessed in a currency exchange rate. On the other hand, The problems of Non-Performing Assets would be better dealt with if there is full convertibility as greater investments by FPIs would cause corporates to pay back the loans on time. Investors are more inclined to invest in the regions where the convertibility norms are relaxed. Similar is true for the companies. Relaxation in currency convertibility norms would discourage companies from shifting their profits to tax havens.

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