Ball set rolling on rupee float

The Reserve Bank of India on Monday set the ball rolling on full capital account convertibility of the rupee by setting up a committee to chalk out a road map. The committee will begin work from May 1, 2006 and is expected to submit its report by July 31, 2006.

The committee, headed by SS Tarapore, former RBI deputy governor, will give recommendations after reviewing experiences gathered from various measures of capital account liberalisation in India so far.

A committee, led by Tarapore in 1997, had recommended a three-year period for complete convertibility, subject to meeting certain conditions.

The other members of the committee are Surjeet S Bhalla, MG Bhide, AV Rajwade, RH Patil and Ajit Ranade.

The announcement came a couple of hours after Finance Minister P Chidambaram told a CII National Council Meeting in New Delhi that his ministry and the RBI had discussed the issue, which was originally proposed to be announced in Budget 2006-07. "It was pulled out of the Budget as it could have overshadowed other fiscal policy announcements," he said.

Prime Minister Manmohan Singh had said in Mumbai on Saturday he had requested the finance ministry and the RBI to revisit the issue of full convertibility of the rupee and come out with a road map based on current realities.

Singh was of the view that given the changes over the last two decades, there was merit in moving towards full capital account convertibility within a transparent framework.

To start with, the RBI committee will examine the implication of fuller capital account convertibility on monetary and exchange rate management, financial markets and the financial system.

It will also study the implications of "dollarisation" in India of domestic assets and liabilities and internationalisation of the Indian rupee.

After studying these implications and the progress made in tackling revenue and fiscal deficits of both the Centre and states, the committee will provide a comprehensive medium-term operational framework with sequencing and timing for full convertibility.

The committee is also expected to lay down policy measures and safeguards to ensure monetary and financial stability. It is also expected to take an integrated view of the domestic financial and fiscal situations and the imperatives of the international financial architecture in capital account liberalisation.

A full float of the rupee will facilitate its conversion into foreign currencies and vice versa -- a move that is expected to lead to enhanced foreign investments in the country. At present, the rupee is convertible on the current account, primarily for trade purposes.

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