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Money > Special December 26, 2002 |
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Creeping convertibility, RBI's gameplanTamal Bandyopadhyay WWho is playing the role of Santa Claus this Christmas? Ask this question to a corporate chief (domestic or transnational), a commercial banker and a treasury manager and there will be only one answer: Reserve Bank of India governor Bimal Jalan. Last Saturday, he offered enough goodies to all the players in the financial markets. He allowed corporations to rebook cancelled forward contracts - a facility that was banned a few years back in the wake of the East Asian currency crisis; multinationals to take forward cover without any RBI permission for their India exposure through the foreign direct investment route since 1993; and Indian banks to invest as much as they want in the overseas money market and debt instruments. Then, there were relaxations in terms of allowing banks to offer limitless foreign currency rupee swaps to corporations and permitting exporters and importers to book forward contracts without any documentary evidence as proof of transactions. Besides, foreign banks operating in India can now take decisions on what extent they want to hedge their tier-I capital deployed here. On the face of it, all these relaxations ensure better risk management by corporations and offer market players greater manoeuvrability. But take a second look at these measures in relation to the RBI's ongoing relaxations on the foreign exchange front and a clear pattern will emerge. Jalan is re-writing the chapters of India's foreign exchange manual. The governor's game plan clearly is creeping convertibility. With every incremental flow of greenback into the markets and consequent increase in the country's forex kitty, he is relaxing rules and taking a quiet march to capital account convertibility. This despite the fact that two well-known economists much admired by Jalan - Paul Krugman and Jagdish Bhagwati - being in favour of temporarily or permanently giving up the capital account convertibility. The S S Tarapore Committee on Capital Account Convertibility (CAC) in May 1997 had charted out a three-stage CAC to be completed by 1999-2000. The committee had indicated certain signposts for capital account convertibility. The three most important of them are: fiscal consolidation, a mandated inflation target and strengthening of the financial system. The committee had recommended a reduction in gross fiscal deficit from 4.5 per cent to 3.5 per cent in 1999-2000 and a mandated rate of inflation for the period 1997-98 to 1999-2000 at 3 to 5 per cent. In the financial sector, the focus was on mainly two parameters: banks' cash reserve ratio and non-performing assets. The recommendations were to reduce gross NPAs as a percentage of total advances from 13.7 per cent in 1996-97 to 9 per cent by 1998-99 and to 5 per cent by 1999-2000. The average effective CRR should come down from 9.3 per cent in April 1997 to 3 per cent by 1999-2000, it had said. The point to note is that none of the core conditions of the Tarapore panel have been met but the RBI has gone ahead charting its own course. Even in 2002-03, banks' CRR is much higher than what Tarapore had recommended and so are gross NPAs not to speak of the fiscal deficit. In essence, RBI's approach is not clinical but sequential. In the run-up to full convertibility, the committee had charted out a phased liberalisation of capital inflows and outflows:
There is still a long way to go. For instance, banks have been allowed to deploy money overseas without any restrictions but only in debt and money market instruments and not in equities. Similarly, the cap on $ 500 million for mutual funds to take overseas exposure may sound too little. Nobody is allowed to punt on the rupee and RBI is still policing the forex market, albeit in a subtle way. But the Reserve Bank seems to be more concerned about "effective convertibility". For all practical purposes, rupee is now virtually convertible on capital account for individuals. As far as business is concerned, all "flow" transactions are convertible; it is only the "stock" - the assets - that is left out. They are allowed to take positions and hedge their investments. The road to convertibility, in India, is a calculated gradual transition path starting in the early '90s when the High Level Committee on Balance of Payments, chaired by C Rangarajan, recommended the introduction of a market-determined exchange rate regime. The Liberalised Exchange Rate Management system was instituted in March 1992 as a transitional phase before the convergence of the dual rates on March 1, 1993. The current account convertibility was achieved in August 1994 by accepting Article VIII of the Articles of Agreement of the International Monetary Fund. At the next stage, a 14-member Sodhani panel, an expert group on foreign exchange was set up in November 1994. The group's report in 1995 helped develop, deepen and widen the forex market through introduction of various products. The Tarapore Committee on Capital Account Convertibility in 1997 was the third and final stage on forex liberalisation. The East Asian currency crisis and the sanctions in the wake of the Pokhran blast had put up some initial roadblocks but now it seems to be back on the central bank's priority list. The RBI push will become stronger once the $ 4.23 billion Resurgent India Bonds are redeemed next year. These bonds were raised in 1998-99 to combat the impact of sanctions. Analysts also feel that the Reserve Bank may target a $100 billion worth of forex chest before taking the final plunge into the dollarisation of the Indian economy. The forex kitty of the country is now above $ 68 billion (as on December 13) and rising by over $ 750 million every week. ALSO READ:
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