Tarapore Committee

The Tarapore Committee occupies an important place in the history of Indian banking and financial sector reforms, particularly in the context of capital account convertibility. Constituted at different points in time, the committee examined the feasibility, preconditions, and roadmap for opening India’s capital account in a calibrated and stable manner. In the broader context of banking, finance, and the Indian economy, the Tarapore Committee’s recommendations reflected India’s cautious and sequenced approach to financial liberalisation.
The committee’s work highlighted the close relationship between macroeconomic stability, financial sector strength, and external sector management.

Background and Context of the Tarapore Committee

Following economic liberalisation in the early 1990s, India progressively opened its economy to global trade and capital flows. While current account convertibility was achieved in the mid-1990s, full capital account convertibility raised concerns about financial stability, exchange rate volatility, and capital flight.
To examine these issues, the Reserve Bank of India appointed the Tarapore Committee to assess whether India was prepared for capital account convertibility and to outline a phased roadmap if conditions were met.
Two major Tarapore Committees were constituted:

• The first in 1997 to examine the feasibility of capital account convertibility
• The second in 2006 to reassess progress and revisit the roadmap in a changed economic environment

Meaning of Capital Account Convertibility

Capital account convertibility refers to the freedom to convert domestic financial assets into foreign financial assets and vice versa at market-determined exchange rates. It allows unrestricted cross-border movement of capital for purposes such as investment, borrowing, and lending.
The Tarapore Committee viewed capital account convertibility not as an end in itself but as a process that must be supported by strong economic fundamentals and financial institutions.

Objectives of the Tarapore Committee

The central objective of the Tarapore Committee was to evaluate India’s preparedness for capital account convertibility and recommend safeguards to minimise associated risks.
Its key objectives included:

• Assessing macroeconomic stability indicators
• Examining the strength of the banking and financial system
• Identifying regulatory and institutional prerequisites
• Proposing a phased and sequenced approach

This cautious approach reflected lessons from international financial crises.

Key Preconditions Identified by the Committee

A major contribution of the Tarapore Committee was the identification of essential preconditions for capital account convertibility. These conditions were designed to ensure that liberalisation would not destabilise the economy.
Important preconditions included:

• Low and sustainable fiscal deficit
• Price stability and low inflation
• Sound banking system with low non-performing assets
• Adequate foreign exchange reserves
• Strengthened prudential regulation and supervision

These conditions linked capital account openness directly to domestic financial health.

Phased Roadmap for Liberalisation

Rather than recommending immediate capital account convertibility, the Tarapore Committee proposed a phased roadmap. Liberalisation was to be undertaken gradually, with continuous assessment of risks and readiness.
The phased approach involved:

• Prioritising long-term and non-debt capital flows
• Gradual relaxation of controls on outward investment
• Strengthening risk management in banks and financial institutions
• Enhancing regulatory oversight of cross-border transactions

This sequencing aimed to maximise benefits while limiting vulnerability to external shocks.

Implications for the Banking Sector

The Tarapore Committee placed significant emphasis on the banking sector, recognising that banks would be central to managing capital flows. A weak banking system could amplify external shocks and transmit instability throughout the economy.
The committee stressed:

• Reduction of non-performing assets
• Improved capital adequacy and provisioning
• Strengthened risk management and supervision
• Enhanced disclosure and transparency

These recommendations reinforced the need for a resilient banking system before deeper financial integration.

Impact on Monetary and Exchange Rate Policy

Capital account convertibility has direct implications for monetary policy autonomy and exchange rate management. The Tarapore Committee recognised that unrestricted capital flows could limit the effectiveness of independent monetary policy.
Accordingly, it emphasised:

• Greater exchange rate flexibility
• Development of deep and liquid financial markets
• Improved monetary policy transmission mechanisms

This framework supported a balanced approach to external openness and domestic policy control.

Significance for Financial Markets

The committee’s recommendations had important implications for the development of Indian financial markets. Gradual capital account liberalisation was expected to:

• Increase market depth and liquidity
• Improve access to global capital
• Encourage financial innovation

However, the committee also warned that premature liberalisation could expose underdeveloped markets to excessive volatility.

Macroeconomic Relevance in the Indian Economy

At the macroeconomic level, the Tarapore Committee highlighted the interdependence of fiscal discipline, financial stability, and external sector management. Capital account openness without sound macroeconomic fundamentals could lead to balance of payments crises and financial instability.
By linking liberalisation to fiscal consolidation and banking sector reform, the committee reinforced the importance of macroeconomic prudence in economic policymaking.