CHENNAI, July 23: The chairman of the Reserve Bank (RBI) committee on capital account convertibility (CAC), SS Tarapore, urged corporates to learn skills in managing foreign exchange risks to benefit from the introduction of full convertibility of the rupee on the capital account. He was speaking at a Confederation of Indian Industry-organmised meet on full rupee convertibilty. The planned float, if carried out in haste, could lead to a Mexico-type meltdown, was the consensus among speakers across the financial sector spectrum.

Business India editor and economist Omkar Goswami said the state of the banking system in general, and public sector banks in particular, was a major stumbling block on the road to full convertibility.

Goswami, who kicked off the discussions, warned companies that if they failed to attain more transparency in operations, investors would seek other avenues which offered better returns.

ANZ Grindlays Bank financial markets chief Arvind Sethi pointed to the lack of depth in the money market and a benchmark yield curve. These were indication enough that the financial sector reforms were not progressing at a satisfactory pace, he said. Interest rates could come down initially after capital account convertibilty is introduced, Sethi said. The lack of sound macro-economic fundamentals could, however, waeken the rupee dramatically, he warned.

There were many fundamental issues. For instance, an exit policy and the seamless flow of savings and investment across sectors which had to addressed at the primary level, Ashok Leyland deputy managing director R Seshasayee said.

Rather than viewing CAC as a means to introduce reforms, the country needed to put reforms in place before CAC could be introduced, he said. Also, the competitiveness of Indian companies had been taken for granted. "A very large number of companies is on the brink of getting uncompetitive to foreign competition," Seshasayee warned.

Defending the need to introduce CAC as envisaged by Reserve Bank (RBI) were Kirit S Parikh and Usha Thorat, respectively member and secretary of the RBI committee on CAC. Parikh said there was a need to highlight the benefits which would accrue from CAC since they had been muted by the defensive attitude adopted to answer criticism. With the adoption of CAC, interest rates would fall, he said. This would make many projects, shelved or new, more viable. The economy and industrial growth would receive a boost, he said. More important, full float would enforce greater discipline and policy consistency, he said.

Parikh played down fears of cuts in the social sectors. The truth was that 45 years of govermennt's interventionist policy had not benefited the social sector, he said, adding that only growth could provide a real boost.

Summing up the panel discussion, ICICI chairman N Vaghul said CAC was a part of the process of integrating with the global economy. The need of the hour is the precautions to avoid problems. He came down heavily on the government's inaction to reform the the public sector. The ICICI chairman said the government did not have a clue to solve the problems. He also called for institutional and market reforms in the financial sector. "We need a strong financial sector if we are to avoid a Mexican or Thailand kind of crisis," he said. "The corporate sector has much to gain and lose in the way it handles the greater freedom to access resources. This is the essence of capital account convertibility for the corporates," he said. The panel, he said, had recommended that corporates be allowed to issue foreign currency-denominated bonds, granted better access to global depository receipts (GDR) and external commercial borrowings (ECB) besides the permission to set up offices abroad.

'These and other measures would bring about a quantum jump in the corporate sector's interface with the international economy. While this would, no doubt, open up new vistas, it is not free lunch for the corporate sector," he remarked, alluding to fresh risks which would emerge before corporates.

While borrowing, companies should take a consicous view of the relative strength of various currencies and avoid facing surprises, Tarapore observed.He said companies should be careful in utilising the new opportunities that would open up on the advent of convertibility and avoid the risk of `overheating' which could stem from a borrowing binge. In a scenario of very low interest rates, trading in some currencies may turn out quite expensive.

Hence, corporates should take care in assessing the currency risk when they borrowing abroad, he said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.