BANGALORE, Aug 6: Former Reserve Bank deputy governor and capital account convertibility panel chairman SS Tarapore said the country should be prepared to grapple with the onslaught of foreign inflows. The economy must be willing to use the entire range of instruments to ensure that the adverse impact of inflows is avoided. He said this against the backdrop of the recent turmoil in the east-Asian currency markets. Tarapore made a case for avoiding monetisation of fiscal deficit, more aggressive open market operations and higher reserve requirements for non-resident deposits, coupled with an increase in the minimum maturity of FCNR(B) deposits, from six months to one year.

Given the present strength of the rupee, an immediate measure which is warranted is to allow foreign institutional investors in the forward market. "It would not be in our interest to allow any further appreciation of the rupee's real effective exchange. It would be disastrous to have any nominal appreciation of the rupee vis-a-vis the dollar," Tarapore said. "It would be desirable to have a transparent exchange rate policy which would generate confidence. Coupled with this, if the extent of intervention is declared contemporaneously with the weekly reserve figures, the need for intervention will be minimised," he said.

The former RBI deputy governor who is credited with charting the road map to full float, was speaking in the light of the recommendation made by his committee for management of the exchange rate in the economy.

He was delivering a special address on `Capital Account Convertibility - Goals and Tasks for the Banking System', organised by the Banker's Club in the city on Wednesday.

The Centre's gross fiscal deficit, Tarapore said, must touch 3.5 per cent by the terminal year 2000. Besides this, the inflation rate should average between 3 per cent and 5 per cent over the next three years, the cash-reserve ratio (CRR) should be down to 3 per cent and non-performing assets to 5 per cent. Refuting charges that the committee's recommendation of a reduction in CRR from 9.3 per cent to 3 per cent would result in total loss of monetary control, Tarapore said the phasing out of automatic monetisation of the fiscal deficit and the progressive move to active open market operations, would facilitate the reduction in reserve obligations. The convertibility committee had also recommended that weak banks be converted into `narrow' ones.

These banks, Tarapore said, should restrict their incremental resources to investments in government securities. They should not be allowed to increase their advances and must severely restrain their liability growth, barring a few cases of extreme weakness, he said.

Tarapore defended the committee's stand, saying a qualitative improvement in public sector banking is very important, particularly in the absence of merger options available to the Indian banking sector.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.