{"id":85964,"date":"2026-02-05T17:14:28","date_gmt":"2026-02-05T11:44:28","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=85964"},"modified":"2026-02-05T17:14:28","modified_gmt":"2026-02-05T11:44:28","slug":"tarapore-committee","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/tarapore-committee\/","title":{"rendered":"Tarapore Committee on Capital Account Convertibility"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The <\/span><b>Tarapore Committee<\/b><span style=\"font-weight: 400;\"> was constituted by the Reserve Bank of India in <\/span><b>1997<\/b><span style=\"font-weight: 400;\"> under the chairmanship of <\/span><b>S.S. Tarapore<\/b><span style=\"font-weight: 400;\">, a former Deputy Governor of the RBI to examine the <\/span><b>feasibility of introducing Capital Account Convertibility (CAC) in India.\u00a0<\/b><\/p>\n<h2><b>Capital Account Convertibility Meaning<\/b><\/h2>\n<p><b>Capital account convertibility<\/b><span style=\"font-weight: 400;\"> means the <\/span><b>freedom to convert rupee into any foreign currency and foreign currency back into rupee for capital account transactions.\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">It enables residents and non-residents to move capital freely across borders for investment, borrowing, and lending purposes.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While it enhances capital inflows and financial integration, it also exposes the economy to volatility and sudden capital reversals.<\/span><\/p>\n<h2><b>Tarapore Committee Recommendations\u00a0<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The Tarapore Committee recommended a three-phase roadmap for achieving full Capital Account Convertibility by the year <\/span><b>1999-2000 <\/b><span style=\"font-weight: 400;\">and it had listed several <\/span><b>preconditions<\/b><span style=\"font-weight: 400;\"> such as <\/span><b>fiscal consolidation, inflation control, low level of non-performing assets, low current account deficit and strengthening of financial markets for achieving capital account liberalisation.<\/b><\/p>\n<h3><b>Preconditions for Capital Account Convertibility<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Tarapore Committee emphasised that strong fiscal discipline is essential before adopting full Capital Account Convertibility. It recommended reducing the <\/span><b>gross fiscal deficit of the Centre to around 3.5 percent<\/b><span style=\"font-weight: 400;\"> of GDP and completely eliminating the revenue deficit to ensure macroeconomic stability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The committee recommended maintaining a <\/span><b>low and stable inflation rate<\/b><span style=\"font-weight: 400;\"> in the range of <\/span><b>3 to 5 percent<\/b><span style=\"font-weight: 400;\">, as high inflation erodes investor confidence.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Capital Account Convertibility should be preceded by <\/span><b>banking sector reforms<\/b><span style=\"font-weight: 400;\">, including reduction of Non-Performing Assets to international standards, improvement in capital adequacy, and enhancement of risk-management practices.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The committee recommended <\/span><b>strengthening prudential norms, regulatory oversight, and supervisory mechanisms<\/b><span style=\"font-weight: 400;\"> to ensure that financial institutions can withstand volatile capital flows and prevent systemic risks.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The committee highlighted the need for a <\/span><b>stable and market-determined exchange rate system<\/b><span style=\"font-weight: 400;\">. Excessive exchange rate volatility under free capital flows could encourage speculative attacks and weaken monetary policy effectiveness.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Restrictions on short-term external borrowings<\/b><span style=\"font-weight: 400;\">, as they are highly volatile and can quickly reverse during periods of global financial stress, posing serious balance of payments risks.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Need to <\/span><b>maintain adequate foreign exchange reserves<\/b><span style=\"font-weight: 400;\"> as a buffer against sudden capital outflows and external shocks.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Despite its detailed roadmap, the <\/span><b>recommendations of the First Tarapore Committee were not implemented<\/b><span style=\"font-weight: 400;\">. The Asian Financial Crisis of 1997\u201398 exposed the dangers of premature capital account liberalisation, particularly for emerging economies with fragile financial systems. Additionally, India\u2019s high fiscal deficit, weak banking sector, and regulatory limitations made full CAC risky.<\/span><\/p>\n<h2><b>Second Tarapore Committee (2006)<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">In <\/span><b>2006<\/b><span style=\"font-weight: 400;\">, the <a href=\"https:\/\/vajiramandravi.com\/upsc-exam\/reserve-bank-of-india\/\" target=\"_blank\"><strong>Reserve Bank of India<\/strong><\/a> re-examined the issue of Capital Account Convertibility in a changed economic environment marked by high foreign exchange reserves, robust growth, and improved financial institutions. A second committee, again chaired by S.S. Tarapore was constituted <\/span><b>to reassess the feasibility of CAC.\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The Second Tarapore Committee (2006) largely reiterated the philosophy of the 1997 Committee, while making certain modifications in line with the changed economic and global context.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Unlike the 1997 committee, which proposed a time-bound roadmap, the 2006 committee rejected fixed deadlines and argued that Capital Account Convertibility should depend on evolving domestic and global conditions.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">For the first time, the committee clearly acknowledged the risks of sudden capital reversals, speculative attacks, and contagion effects, drawing lessons from the Asian Financial Crisis (1997) and other emerging market crises.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While the earlier committee aimed at full CAC, the second committee accepted that partial capital account convertibility could be a long-term equilibrium for India, rather than merely a transitional phase.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The committee stressed that capital account liberalisation should be reversible, allowing the government and RBI to reintroduce controls if financial stability is threatened.<\/span><\/li>\n<\/ul>\n<h2><b>Capital Account Convertibility in India\u00a0<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">In India, the <\/span><b>rupee is partially convertible to capital account<\/b><span style=\"font-weight: 400;\">. RBI does not allow full conversion of Rupee into foreign currencies and foreign currencies into Rupee for transactions falling under the capital account of BoP. RBI has placed restrictions on the value of transactions that anybody can do under a capital account.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Rupee will move to full capital account convertibility once the macroeconomic parameters like current account deficit, fiscal deficit, external debt, inflation become stable at low range and there is resilience to absorb shocks related to capital outflows.<\/span><\/p>\n<h2><b>UPSC CSE Prelims PYQs<\/b><\/h2>\n<ol>\n<li><b> Convertibility of rupee implies [2015]<\/b><\/li>\n<\/ol>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">being able to convert rupee notes into gold<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">allowing the value of rupee to be fixed by market forces<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">freely permitting the conversion of rupee to other currencies and vice versa<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">developing an international market for currencies in India.<\/span><\/li>\n<\/ol>\n<p><b>Answer: (c) freely permitting the conversion of rupee to other currencies and vice versa<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Read about the Tarapore Committee, Capital Account Convertibility meaning, key recommendations, preconditions, why full CAC failed, and India\u2019s present position.<\/p>\n","protected":false},"author":25,"featured_media":85984,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[786],"tags":[5152],"class_list":{"0":"post-85964","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-general-studies","8":"tag-tarapore-committee","9":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/85964","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/25"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=85964"}],"version-history":[{"count":5,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/85964\/revisions"}],"predecessor-version":[{"id":86182,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/85964\/revisions\/86182"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/85984"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=85964"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=85964"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=85964"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}