[Solved] Which of the following statements about the impact of capital account convertibility is TRUE? — Ans: It allows unrestricted capital flows, increasing risk of sudden outflows | Economic Awareness

Economic Awareness - Sectors of Indian Economy

Which of the following statements about the impact of capital account convertibility is TRUE?

AIt guarantees stable foreign exchange rates

BIt eliminates the need for RBI intervention in forex markets

CIt restricts foreign direct investment in India

DIt allows unrestricted capital flows, increasing risk of sudden outflows

Step-by-Step Solution

Step 1: Understand capital account convertibility impact
Full capital account convertibility allows free capital flows but increases risk of sudden capital flight and volatility.
Step 2: Identify true impact
Unrestricted capital flows increase risk of sudden outflows.
Step 3: Other statements false
No guarantee of stable rates; RBI may intervene; does not restrict FDI.
Final Answer:
It allows unrestricted capital flows, increasing risk of sudden outflows → Option D
Quick Check:
Capital convertibility = risk of outflows ✅

Quick Trick: Capital account freedom increases volatility risk.

Common Mistakes:

MISTAKES

Assuming capital account convertibility stabilizes forex rates or restricts FDI.

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