Full Rupee Float In Three Years

in phase-I, 75 per cent in phase-II and 100 per cent in phase-III, with a sub-limit on short-term borrowings, the committee has said.

The committee has said that foreign direct and portfolio investment and disinvestment should be governed by comprehensive and transparent guidelines, and prior RBI approval at various stages may be dispensed with, subject to reporting by ADs. All non-residents may be treated on par for the purposes of such investments, it is recommended.

The committee feels that foreign institutional investors (FIIs), non-residents and non-resident banks should be allowed into the forward markets and all India financial institutions should be made authorised dealers. The committee has said that currency futures be introduced with screen-based trading and efficient settlement systems.

 

As a precondition to CAC, the committee feels that there should be a reduction in the Centres gross fiscal deficit (GFD) to GDP ratio from a budgeted 4.5 per cent in 1997-98 to 4 per cent in 1998-99, and further to 3.5 per cent in 1999-2000. This should be accompanied by the states deficit as also a reduction in the quasi fiscal deficit. In order to avoid a crisis due to financing the amortisation of government borrowings out of fresh borrowings, the committee has recommended the forming of a consolidated sinking fund (CSF). This will create a more transparent fiscal system, the committee points out.

The committee has urged that any increase in the profit transfer from the RBI to the government as well as the proceeds from disinvestment should be used entirely towards building up a CSF.

The committee has recommended that this government set up its own office of public debt. The Reserve Bank should totally eschew from participating in the primary issues of government borrowing, it has said.

The mandated rate of inflation for the three-year period should be an average of 3-5 per cent. There should be an early empowering of the Reserve Bank on the inflation mandate approved by Parliament and only Parliament should alter that mandate, the committee said.

Once the mandate is given, RBI should be given freedom to attain the target and there should be clear and transparent guidelines on the circumstances under which the mandate could be changed, the report says.

The committee feels that such a mandate would necessarily need to provide for greater independence for RBI.

The committee has stressed the strengthening of the financial system as the most important precondition to move to CAC. It has recommended a fully deregulated interest rate regime in 1997-98 and effective cash reserve ratio, which is currently 9.3 per cent, to 8 per cent in 1997-98, 6 per cent in 1998-99 and 3 per cent in 1999-2000.

The committee feels that drastic measures should be taken to bring down gross non-performing assets (NPAs) from the tentative estimate of 13.7 per cent in March 1997 to 12 per cent in 1997-98, 9 per cent in 1998-99 and 5 per cent in 1999-2000.

The committee also recommended that weak banks should be converted into narrow banks, that is, banks whose incremental resources are deployed only in government securities. In extreme cases of weakness, restraint should be applied on liability growth, the committee has said.

The committee has also recommended that certain important macro economic indicators, such as, the exchange rate, balance of payments and adequacy of reserves should be monitored while determining the appropriate timing and sequencing of CAC.