RBI aims to achieve capital account
convertibility: Dr Rangarajan

The Reserve Bank of India hopes to achieve certain aspects of the capital account convertibility, as recommended by the Tarapore Committee, by the end of the current fiscal year.

RBI Governor Dr Chakravarty Rangarajan said it was feasible to take some measures towards CAC if the inflation rate continues to hover around the present six per cent and the fiscal deficit is restricted to about 4.5 per cent.

"We are looking into the interactive process between the liberalisation of capital transaction and the crucial preconditions so that certain transactions related to capital account can be identified for relaxation under the present economic environment," Dr Rangarajan said.

Without committing on the time-frame for implementing measures towards CAC, the governor said the signposts (preconditions) for CAC were essential to facilitate gradual relaxation of the capital account transactions without destabilising the economy.

The Tarapore Committee had recommended a three-year time period to reduce the government fiscal deficit and gross domestic product ratio from the budgeted 4.5 per cent to 3.5 per cent, and the inflation rate from the current 5.9 per cent to 3 per cent. These are the signposts before going for full capital account convertibility of Indian rupee.

Dr Rangarajan expressed confidence over a robust recovery in industrial production during the current fiscal year following easy availability of finances at lower interest rate, better agricultural production, expectation of another good monsoon, and growing business volume in world trade.

He said the trend over the last three years had brought about a significant shift in the perception relating to the Indian economy's long-term growth prospects, thus creating a major impact on long term investment opportunities. This is reflected in a higher savings rate, a lower order of fiscal deficit, a sustainable external payments situation and a relatively stable exchange rate environment, he said.

However, the governor pointed out that the economy witnessed a major slow down in industrial growth in 1996-97 which resulted in a decline in real GDP growth rate from the expected 6.8 per cent level. The industrial growth which touched a peak of 11.6 per cent in 1995-96 was 7 per cent in February 1997.

Besides slackness in the growth of infrastructure projects, the consumer goods sector declined considerably to 4.6 per cent in February as compared to the 12 per cent growth it registered in the previous year. Similarly, the growth of consumer durables fell sharply to five per cent in February as against the previous year's 35.4 per cent.

The governor said that these factors were further aided by a decline in the world trade volume from 9.7 per cent to 5.4 per cent in 1996 which resulted in a sharp drop in export growth from 21.4 per cent in US dollar terms to just 4 per cent. However, in terms of special drawing rights, the export growth fall was restricted to 9.5 per cent from the 17.3 per cent in 1995-96.

Dr Rangarajan said the first couple of months of the current year had shown an improvement in the credit offtake, mainly by the industrial sector.

He said there was an overall fall in both short-term and long-term interest rates in the recent past which would encourage borrowing. The non-food credit is expected to grow at 20 per cent in the current fiscal year which is adequate to take care of industrial growth.

The interest rate on 91-day treasury bills, the governor said, has declined to 6.75 per cent in June this year from the 12.4 per cent of last June. Similarly, 364-day bills' interest rate declined to 8.9 per cent from 12.9 per cent, while the 3-year government bond rate declined to 12.4 per cent from 13.4 per cent.

As per the latest trend in credit offtake, the growth in bank non-food credit expanded by Rs 13.31 billion during the first two months of the current fiscal year as against a decline of Rs 30.45 billion during the same period in the previous year. Thus, the governor pointed out, there has been a turn around of about Rs 43 billion in non-food credit.

The current availability of large bank credit at lower interest rates coupled with the revival of demand from rural sector as well the export front would help accelerate the industrial growth rate in the current year, Dr Rangarajan said.

The governor said he was comfortable with the present stability of the rupee, at Rs 35.80-85.

Speaking about the capital market, Rangarajan said the market would remain depressed as long as the corporates failed to fulfill their promises to the investors.

The governor also ruled out any major shake-up in the banking industry in the near future as majority of Indian banks had already undergone major structural changes in order to maintain an edge in their respective areas of operation.