3-5% Inflation Rate Must Before Phasing In Of Full Convertibility

S S TARAPORE COMMITTEE CHARTS COURSE FOR CAPITAL ACCOUNT CONVERTIBILITY OF RUPEE

The Tarapore committee has strongly recommended a mandated average rate of inflation of three to five per cent for the three year period when capital account convertibility will be introduced in phases.

Inflation control is key to CAC as it has a bearing on the exchange rate. In fact, if the inflation goes beyond control, there is always a possibility of flight of capital.

Once the inflation rate is fixed, there should be an early empowering of the RBI on the inflation mandate approved by parliament and only parliament should alter that mandate. The committee has said that once the mandate is given , RBI should be given the freedom to attain that target.

The committee has said that there should be clear and transparent guidelines on the circumstances under which the mandate could changed. This should empower the RBI with greater autonomy in its operations which will be required in context of the impending CAC decision .

Among one of the pre-requisites for CAC is a stable fiscal policy and further recommendations have been given by the Tarapore committee yesterday to the RBI governor C Rangarajan . The committee has recommended that the government take action on lines of the act governing the Government of New Zealand . It has been noted by the committee that inflation in the developed countries has averaged around 3 per cent and also in most of these countries the central bank receives a mandate for containment of inflation in a particular band.

The committee has recommended that the RBI be empowered as soon as possible with an inflation mandate . This mandate , the committee felt, should be in the form of a medium-term inflation mandate by the parliament . The revision in these rates can be done only by the parliament in case it is required and that the measures for changing the mandate should be in the form of clear and transparent guidelines . On its part the RBI should ensure that it employs all the tools in its power to keep the inflation in this band of range .

As India moves towards CAC a higher rate of inflation would be destabilising and that it would spur a higher level of nominal and real interest rates which would be detrimental to the growth of the economy . However the committee has cautioned that a very low rate of interest rates would result in outflow of capital from the country . The committee has said that the present RBI target on a 15.5 - 16 per cent increase in M3.