Committee on Capital Account Convertibility

Committee on Capital Account Convertibility, commonly known as the Tarapore Committee, was an experts' committee formed by the Reserve Bank of India to study the feasibility of capital account convertibility in India. It submitted its report in 1997.[1]

Members

The committee was formed on 28 February 1997. The members were:[1]

  1. S. S. Tarapore, Chairman
  2. Surjit S. Bhalla
  3. M. G. Bhide
  4. Kirit Parikh
  5. A. V. Rajwade

The objective of the committee was to study economies that had implemented capital account convertibility and understand the prerequisites for it. They had to make recommendations on the measures to be taken and the time frame to achieve full capital account convertibility. They also had to suggest changes in the domestic financial policy and institutional framework required to achieve the objective. The team was asked to submit its report by 30 May 1997.[1]

Report

The report was submitted on schedule. On 3 June 1997, the report of the committee was formally presented to the RBI governor C. Rangarajan. The report was contained in five chapters and eleven annexures.[2]

The report noted that India had adopted current account convertibility in August 1994, in accordance to Article VIII of the Articles of Agreement of the International Monetary Fund (IMF). It also noted that capital account convertibility already existed for foreign investors, both direct and portfolio, non-resident depositors and Indian corporates which take external commercial borrowings (ECB). But, there were restrictions on the ability of Indians citizens and corporates to send capital abroad. There were also restrictions on transfers of capital associated with banks and non-banking financial companies. The report said that implementing capital account convertibility would increase capital inflows. But, it would make it difficult to implement an effective domestic monetary policy. The report suggested that capital account convertibility should not be fully implemented until weaknesses in the financial systems are completely eliminated. However, the report said that the time was appropriate for India to take some steps towards it.[2]

The report said that the move should be made in three phase: Phase I (1997–98), Phase II (1998–99) and Phase III (1999-2000). The transition from one phase to the next should be made, only if certain preconditions are met. The preconditions were reduction of fiscal deficit, keeping the inflation in a 3-5% range and reforming the financial sector, including reduction of non-performing assets. The report also supported the then proposed Foreign Exchange Management Act (FEMA).[2]

Implementation

Based on the recommendations of the committee, the Foreign Exchange Regulation Act (FERA) was repealed and replaced with Foreign Exchange Management Act (FEMA) in June 2000. FERA was considered a very rigid regulation and promoted conservation of foreign exchange. FEMA in turn encouraged the formation of a foreign exchange market and facilitated trade.[3]

See also

References

  1. 1 2 3 "Press Release: Committee on Capital Account Convertibility". Reserve Bank of India. 28 February 1997. Retrieved 15 May 2015.
  2. 1 2 3 "Press Release: Report of the Committee on Capital Account Convertibility". Reserve Bank of India. 3 June 1997. Retrieved 15 May 2015.
  3. ↑ Thummuluri Siddaiah (2010). International Financial Management. Pearson Education India. p. 24. ISBN 978-81-317-1720-2. Retrieved 15 May 2015.
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