The RBI has 3 sets of reasons to delay full capital account convertibility:
- A weak monetary and banking system, high fiscal vulnerability with oil price rise still unabsorbed and inflation not fully in control
- Runaway currency appreciation and loss of monetary policy freedom
- Volatile short-term or hot money coming in as well as big capital flight in case of political instability
It was the fastest major financial committee ever set up—just two days after the PM suggested it. Its report too was submitted in a record five months. But the second Tarapore committee—asked to examine if the time was ripe to make the rupee fully convertible—has raised more questions than it was mandated to answer. Going by current indications, Union finance minister P. Chidambaram's dream of attracting more FDI through a freer rupee is destined to remain just that. Even residents' hopes of getting more freedom to meet their forex needs is unlikely to be fulfilled soon.
At a macro level, the committee recommended that there was no hurry to opt for full convertibility, and set a five-year roadmap to achieve the status. Moreover, it spelled out several restrictions too. But most economists, including former RBI governors, seem unhappy with the Tarapore-II report. Some actually accuse it of regressing in terms of opening up the capital account, apart from being simply incremental, wishy-washy, bogged in minutiae and completely missing the big picture. Others say the convertibility timetable is too slow and cautious.
Experts consider that the committee's suggestion for a +Rs 5/-Rs 5 band for the rupee (real effective exchange rate, REER), inviting RBI intervention beyond this limit—is a "gift to speculators"....