RBI report on fuller convertibility on capital a/c
Mumbai, Sept 2: A Reserve Bank of India expert panel, headed by former RBI deputy governor S S Tarapore, has released a report on fuller convertibility on the capital account whose recommendations, if accepted, will have far reaching consequences on the Indian financial system.
For instance, resident Indians, in five years, will freely remit as much as USD 200,000 abroad and open bank accounts anywhere in the world, foreign individuals will invest in Indian stock market, local corporates and banks will take large foreign loans, and overseas companies will do rupee borrowings from India.
It calls for lower government stake in PSU banks, and asks that industrial banks be allowed in the Indian banking space, among other measures.
The report lays down a five-year roadmap, saying that the overall external commercial borrowing (ECB) ceiling and automatic approval ceiling should be gradually raised.
It proposes that ECBs of 10-year maturity in 2006-07 and seven-year maturity in 2007-08 should be outside ceiling, while end use restriction on ECBs should be removed for 2006-07.
It further advocates the review of transaction limit of USD 20 million on import-linked loans. It asks for the revamping of import linked loan scheme to unlimited borrowing. Further, the limits for corporate investment abroad should be doubled in phases.
It calls for prohibiting the FIIs from investing fresh money via participatory notes (P-notes) and recommends phasing out of existing P-notes within one year.
It has recommended for allowing the non-resident corporates to invest in Indian equities via mutual funds (MFs) and portfolio management service (PMS) schemes. Non-multilateral foreign institutions, it suggests, should be allowed to raise rupee bonds; while banks' overseas borrowings should be linked to paid-up capital and free reserves.
The report advocates raising banks' overseas borrowings substantially to 100 per cent by 2008-09. According to the report, Indian MFs' overseas investment limit should be doubled to USD 4 billion by 2007-08 and should go up to USD 5 billion by 2008-09.
Similarly, it says that Indian Portfolio Management Schemes should be allowed to invest abroad. Limit on individual foreign currency account overseas has also been proposed to be hiked to USD 200,000 by 2008-09.
However, it has recommended abolition of unlimited individual investment in foreign companies with 10 per cent stake in Indian companies.