Capital Account Convertibility of the Indian Rupee implies

Capital account convertibility (CAC) refers specifically to the freedom to convert domestic currency into foreign currency for capital/financial transactions — i.e., free movement of capital and conversion of financial assets — not routine current-account payments. The general notion of convertibility and its two types (current vs capital) is described as conversion at market rates [1]. The capital account records inflows/outflows that change residents’ foreign assets and liabilities (capital/financial transactions) [2]. Official definitions (Tarapore/IMF-style) define CAC as the freedom to convert local financial assets into foreign financial assets and vice versa [3]. By contrast, current-account convertibility covers travel and trade in goods/services and is permitted under RBI rules [4]. Therefore option 3 is correct.

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CONVERTIBILITY OF INDIAN RUPEE > p. 498
2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
3. [3] https://www.bis.org/review/r211018a.pdf
4. [4] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Current Account Convertibility: > p. 109