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Rediff.com  » Business » India nears free float of rupee

India nears free float of rupee

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September 02, 2006 13:58 IST

The SS Tarapore committee on fuller capital account convertibility has recommended loosening of controls on capital flows in three phases, over a five-year period ending 2010-11.

The committee's report, submitted on July 31, was released by the Reserve Bank of India on Friday. It sought a ban on participatory notes as an instrument of investments in Indian equities, and near erasure of the distinction between Non-Resident Indians and foreign individuals for investments in India.

"For non-resident individuals other than NRIs, there is near-zero convertibility," the panel said.

It further suggested lifting controls considerably on borrowings overseas by both companies and banks, doubling the limits for corporate investments abroad, and extending the same leeway for non-corporate businesses.

Two panel members, AV Rajwade and Surjit S Bhalla, gave detailed dissent notes on some recommendations. The other members of the panel are: Tarapore (chairman), MG Bhide, Ajit Ranade and RM Patil.

The panel wanted substantial easing of controls on external commercial borrowings (ECBs). It said restrictions on end-use of ECBs should be removed in the first phase (by March 2007), and exempting ECBs of over 10-year maturity in Phase I and those of over seven-year maturity in Phase II from the ECB ceiling.

This effectively means the ECB ceiling should be applicable only for maturity periods up to 7 years.

The Tarapore committee also wanted foreign institutions and corporates to be allowed to raise rupee resources (with an option to convert into foreign exchange), subject to an overall ceiling, in addition to the permission given to multilateral institutions.

On the committee's suggestion, the RBI has set up a task force headed by Salim Gangadharan, chief general manager in charge of RBI's foreign exchange department, to re-examine the current regulations and recommend removal of the operational hurdles in the path of liberalisation already in place.

The committee was set up after Prime Minister Manmohan Singh said in March that the country's economic condition internally and externally had become far more comfortable in the past few years.

A finance ministry official on Friday said the RBI had sent the report to the ministry, but no time-line had been set with regard to its implementation

The committee said the concomitants for a move to fuller capital account convertibility would be fiscal consolidation, setting of medium-term monetary policy objectives, and the strengthening of the banking system.

It suggested that if foreign capital inflows rose in a big way, the authorities could consider the imposition of an "unremunerated reserve requirement" on fresh inflows.

The present facility for individuals to freely remit $25,000 per calendar year has been sought to be raised to $50,000 in Phase I, to $100,000 in Phase II, and $200,000 in Phase III.

It recommended the central bank be given "unfettered instrument independence" in attaining monetary policy objectives agreed with the government, and said India's large fiscal deficit made it vulnerable to shocks in a regime of greater convertibility.

The government made the rupee convertible on current account in 1994. This means it can be converted freely for specific purposes like trade-related expenses, corporate interest payments on loans taken abroad, and business travel, among others.

But the rupee still cannot be converted freely into foreign currency for acquiring overseas assets like shares or real estate, banks cannot accept deposits in many foreign currencies, and approval is needed for movement of capital across borders.

BS Reporter in Mumbai
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