Chidambaram in New Delhi on Monday. (PTI)

March 20: The Reserve Bank of India (RBI) today formed a six-member committee headed by S. S. Tarapore that will prepare a roadmap towards capital account convertibility ? the first step towards making the rupee freely convertible.

Besides Tarapore, the committee consists of Surjit S. Bhalla, M.G. Bhide, R.H. Patil, A.V. Rajwade, and Ajit Ranade.

Last Saturday, Prime Minister Manmohan Singh signalled the push towards fuller capital account convertibility at a meeting with the Reserve Bank officials in Mumbai.

The Prime Minister had favoured a full float of the rupee saying India’s position, both internally and externally, had become far more comfortable in the last two decades.

Earlier in the day, finance minister P. Chidambaram said, “The Prime Minister has made a very definitive statement day before yesterday and the RBI and the government will announce the next steps (on capital account convertibility) in a few days from now.”

However, the RBI announced the formation of the committee just a few hours later.

The six-member team has been asked first of all to review the various measures taken till date on capital account liberalisation. It has been asked to examine the implications of fuller capital account convertibility on monetary and exchange rate management, financial markets and the financial system.

It has also been asked to study the implications of dollarisation of domestic assets and liabilities and internationalisation of the Indian rupee.

The committee will suggest a comprehensive medium-term operational framework, with sequencing and timing, for fuller capital account convertibility taking into account the implications of such a move and the progress in revenue and fiscal deficits of both the Centre and the states.

It will also survey the regulatory framework in countries which have advanced towards fuller capital account convertibility. It will suggest appropriate policy measures and prudential safeguards to ensure monetary and financial stability.

The committee will commence its work from May 1 and is expected to submit its report by July 31.

At present, the rupee is convertible on current account, essentially on the trade account. Chidambaram said the finance ministry and the central bank had discussions on capital account convertibility of the rupee. The issue could have been part of the budget for 2006-07. “But it was pulled out of the budget as it could have overshadowed other fiscal policy announcements,” he said.

After India opened its doors to economic reforms in 1991, the rupee has become fully convertible on current account but the Reserve Bank adopted a cautious approach towards a full float of the Indian currency. The central bank has particularly been cautious after the 1997 Southeast Asian currency crisis that led to a flight of capital from those countries.

This is the second time that Tarapore will be heading a committee dealing with the same subject. In 1997, a committee headed by him had recommended a three-year time frame for complete convertibility by 1999-2000 subject to satisfying certain conditions.

These conditions included bringing down gross fiscal deficit to 3.5 per cent of GDP as of 1999-2000, keeping the inflation rate at an average 3 to 5 per cent for the above three-year period. The government was also required to design external sector policies to increase current receipts to GDP ratio and bring down the debt servicing ratio from 25 per cent to 20 per cent.

As the conditions stand now, fiscal deficit is expected to come down to 3.8 per cent of GDP next fiscal, wholesale price-based inflation rate hovers over 4 per cent so far this fiscal, current account deficit is below 3 per cent and foreign debt is around $20 billion lower than the forex reserves.