Rbi Unlikely To Push Through Capital Account Convertibility

The Reserve Bank of India is in no hurry to push through capital account convertibility (CAC). At a meeting with international operations heads of Indian banks and authorised dealers in Mumbai today, RBI governor Bimal Jalan made it clear that the forex markets will continue to be regulated and the central bank will use the "levers" to control the markets which have been able to withstand global turmoil over the last few years.

Even though he did not say anything specific, bankers attending the meeting felt that the country will have to wait for years for CAC. Jalan, however, said procedural liberalisation will continue and the shift to CAC will be gradual. The twin objectives are to liberalise the rules governing forex transactions for the convenience of customers and keep the external sector stable.

 

The meeting was also attended by two RBI deputy governors, YV Reddy and Vepa Kamesam, and executive director KJ Udeshi.

The RBI governor was reportedly comfortable with the current interest rate scenario and the happenings in the foreign exchange markets. The RBI will continue to keep a close watch on the developments in the money and foreign exchange markets and will intervene as and when a crisis occurs, he said.

Jalan said it is the high foreign exchange reserves and a proper exchange rate management policy that have helped the Indian financial sector withstand several external shocks like the east Asian crisis, US sanctions in the aftermath of the Pokhran explosion, the Kargil conflict and the terrorist attacks on the United States on September 11 besides rising oil prices.

In 1997, the Tarapore committee on CAC recommended a three-phase transition to full convertibility culminating in 1999-2000. Identifying the milestones for CAC, the Tarapore panel said the gross fiscal deficit should be brought down to 3.5 per cent and mandated inflation rate between 3 and 5 per cent as necessary pre-conditions for CAC. Other milestones were fully deregulated interest rates, a 3 per cent cash reserve ratio (CRR) and 5 per cent non-performing assets (NPAs) of banks.

The committee said fiscal consolidation, mandated inflation rate, and strengthening of the financial system should be addressed properly before making the capital account fully convertible. It also said that the exchange rate, the balance of payments and the adequacy of reserves need to be monitored while determining the appropriate timing and sequencing of CAC.

At today's meeting, Jalan reportedly said that an over 5 per cent growth rate is achievable despite sluggish exports. Two major areas of worry, according to Jalan, are tardy industrial growth and exports.