Terms For Rupee Full Float Attainable, Says Tarapore

S S Tarapore, chairman of the Reserve Bank of India-appointed committee on capital account convertibility (CAC) yesterday told Business Standard that the present state of the economy is apposite to undertake a phased introduction of CAC. The pre-conditions outlined by the committee are attainable within a three-year period, claimed Tarapore in an exclusive interview.

Tarapore added that the move towards CAC would gain substantial credibility if some steps to liberalise capital outflows were taken early on. In this context, he suggested measures such as enhancing the limit on investment by Indian joint ventures abroad and removing controls on time-bound repatriation of profits.

 

The report of the Tarapore Committee was submitted to RBI governor C Rangarajan last week. Both the central bank and the Union finance ministry are yet to formalise their responses and actions on the committees recommendations to adopt full convertibility by 2000, subject to fulfilment of a detailed set of conditions. Tarapore pointed out that a real GDP growth of seven per cent and an inflation rate of six per cent are among the factors that are favourable for a switch-over to CAC. However, he said the committees pre-conditions have emphasised the need to adhere to present macro policy objectives.

Now, if we were to skip the pre-conditions, we would be inviting chaos. As such, the preconditions and the measures have to move together, Tarapore warned. He added that the move to CAC would need to be speeded up or delayed, depending on the success or failure in the attainment of the preconditions.

Commenting on the committees recommendation on a Parliament-mandated adherence to an inflation target, Tarapore said it is Parliament which approves the government budget and it should be Parliament which should give a mandate to the central bank on the inflation rate. This would avoid policies working at cross purposes, he said.

But once the mandate is given, the central bank should have the unfettered freedom to use monetary policy instruments to achieve the goal. Such a mandate can be altered, but only if Parliament feels that the fall-out of the inflation rate stipulated by it is not acceptable. There should, however, be clear and transparent guidelines on the circumstances under which the mandate could be changed, he said.