Rajan's promise of more measures in the next few weeks to reduce imports and incentivise exports came after the RBI decision to keep interest rates unchanged in its first quarter monetary policy review where it highlighted the external risk to the economy and indicated that growth would be brought back on its radar once the rupee recovers.
The central bank said its recent liquidity tightening measures would be withdrawn in a calibrated manner once stability is restored in the forex market. However, hours after the RBI's announcement, the rupee slipped 1.5% to trade at 60.3 to a dollar in the Tuesday afternoon session, effectively erasing all gains made since the central bank took steps to stabilize the currency.
It touched an all-time low of 61.21 to the dollar on July 8.
India's current account deficit touched a record $88 billion or 4.8% of the GDP in 2012-13, owing primarily to a surge in gold imports. Although the government and RBI clamped down on gold imports by raising taxes and other regulatory measures, analysts foresee the CAD this fiscal to be roughly the same level as last year's. Finance minister P Chidambaram, too, had said in Ahmedabad on Monday, For 2012-13, the CAD stood at about $88 billion (4.8% of GDP), which was fully financed by the government. It is estimated to be around same number for 2013-14 and government is hopeful that it will be able to finance it fully without drawing reserves.
The government is considering more steps to curb non-essential imports, including luxury items to reduce the trade and current account deficits, while it has limited options to grow exports unless the US and EU economies pick up. Imports of certain items also pose a risk to inflation.
Rajan, however, said he believed CAD would be brought down significantly this fiscal year, regardless of global growth. Of course, if growth picks up in the US and UK, our CAD will come down faster, he said. The RBI said "the large CAD, well above the sustainable level of 2.5% of GDP for three years in a row, is a formidable structural risk factor."
Refraining from indicating a level for the rupee with which the government would be comfortable, Rajan said, "We are not defending any particular level of rupee. We do not associate stability with any particular number. We associate stability with lower volatility...market participants should believe that the rupee is stable." On how to contain the CAD, he said, although everything was on the table, "we are focusing on narrowing down those options to a set of measures that we will be able to announce.
The RBI, too, has plenty of ammunition to deal with the situation, he said, adding, "We should not doubt the joint resolve of the government and RBI in taking action to stabilise the rupee."
Going by the RBI's assessment in today's policy, it is clear FY14 will not be a qualitatively better year than FY13 given all the uncertainties. We could have the same growth as last year or a tad better, but not qualitatively better. The cash tightening measures will not directly impact growth, but aggravate the downward trajectory which is already being seen in growth," Rupa Rege Nitsure, chief economist at Bank Of Baroda said.