In 1997, the Tarapore committee took on the convertibility question. For a glance at the zeitgeist of the time, see an article I wrote in ET at the time. The conventional wisdom is that the report was buried after the East Asian Crisis. I disagree. I think Bimal Jalan did an amazing job of chipping away at capital controls through his period as RBI governor, once the early problems of 1998 were put behind. At the level of rhetoric, the word "convertibility" was avoided, while steadily moving forward to de facto convertibility, and obtaining a steady increase in the size of the capital account when compared with GDP.
On 18th (Saturday), Manmohan Singh did a speech in Bombay where he said:
Today, globalization is changing many familiar things the way we think, act and perform. It is changing central banking too. Funds in large amounts move across borders with ease and speed. Maintaining financial stability in the face of such forces of globalization is a challenge. But globalization is an opportunity too as it makes it possible to harness global capital in search of investments for furthering national goals. The Reserve Bank has to remain ahead of the curve so as to minimize the costs and maximize the benefits of globalization for the country.
A proposal to make Mumbai a Regional Financial Centre is already under active consideration. Our economic reforms have accelerated growth, enhanced stability and strengthened both external and financial sectors. Our trade as well as financial sectors are already considerably integrated with the global economy and the trend is irreversible. Mumbai, with all its inherent advantages in terms of human capital and commercial acumen, can be positioned as a viable Regional Financial Centre. We need to work towards this objective.
Given the changes that have taken place over the last two decades, there is merit in moving towards fuller capital account convertibility within a transparent framework. This issue was first examined by the Tarapore Committee. Much water has flown down the Ganga since then. Our own position, internally and externally, has become far more comfortable. I will therefore request the Finance Minister and the Reserve Bank to revisit the subject and come out with a roadmap based on current realities. Progress in this regard will facilitate the transformation of Mumbai into not only a Regional but also a Global Financial Centre.
On 20th (Monday), Chidambaram said some intruiging stuff. E.g., the story in BS says:
With Prime Minister Manmohan Singh favouring full float of the rupee, Finance Minister P Chidambaram today said the government and the Reserve Bank of India (RBI) would, in the next few days, announce steps on capital account convertibility of the Indian currency.
"Prime Minister has made a very definitive statement day before yesterday, and the RBI and the government would announce the next steps (on capital account convertibility) in a few days from now," he said at a CII function this morning.
Chidambaram said the finance ministry and RBI had discussions on capital account convertibility of the rupee, and the issue could have been part of Budget 2006. "It was pulled out of the Budget as it could have overshadowed other fiscal policy announcements," he said.
A few hours later, RBI moved, setting up a RBI-friendly committee that will write a report about where to go next. The committee consists of S. S. Tarapore, Surjit Bhalla, M G Bhide, A V Rajwade, R H Patil and Ajit Ranade. An interesting composition: three Ph.D.s, some macroeconomics (Surjit), some finance (Bhide, Rajwade, Patil). I tried to look up recent writings by Tarapore in FE, but he seems to have stopped writing in recent years.
The speed in setting up this committee is astonishing. E.g. the Percy Mistry committee on Bombay as an international financial centre took one year from budget speech to setting up the committee. In contrast, this was setup in a few hours.
The Tarapore-2 committee will start work on 1 May and submit on 31 July. This differs from announcing steps in the next few days as stated by the FM. It is about putting off steps till 31 July. :-)
In short, I don't understand what is going on. There is some chess game afoot that I'm only dimly comprehending. Why did Manmohan Singh and Chidambaram say what they said, in quick succession? Why did RBI rapidly create this committee? Why these names for the committee?
It took a few days, but top quality commentary has started appearing in the media:
- An editorial in BS argues that moving towards convertibility should leave banks out of the mainstream, and that it's time to fix the debt market and commodity futures regulation. It emphasises that there will be six great currencies in the years to come: the USD, Euro, JPY, GBP, CNY and INR. They say we have to build an INR yield curve which is a target for investment and issuance for the whole world. I will point out that of the six currencies, the institutional structures underpinning the Euro are not yet fully done. E.g. see this recent article by J. Bradford DeLong. And the CNY, of course has huge problems. So prospects for the INR may be a bit better than might otherwise have been the case.
- G. Ramachandran has an excellent piece in Hindu Business Line where he emphasises the link between greater openness and greater currency flexibility.
- Ila Patnaik has an excellent `Gained in Translation' on the subject.
This story started with a speech by the PM on the 18th of March and today is March 23. It's a fast moving game. These developments could also influence the Percy Mistry committee on Bombay in interesting ways.