The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that as India had a large trade deficit in the first quarter, negative market perceptions led to sharper outflows in the foreign institutional investors (FIIs) investment debt segment, leading to 13.0 per cent depreciation of the rupee between May 2013 and August 2013. The government swiftly moved to correct the situation through restrictions on non-essential imports like gold, custom duty hike in gold and silver to a peak of 10 per cent, and measures to augment capital flows through quasi-sovereign bonds and liberalization of external commercial borrowings.

The RBI also put in place a special swap window for foreign currency non-resident deposit (banks) [(FCNR (B)] and banks’ overseas borrowings through which US$ 34 billion was mobilized. The one-off flows arrested the negative market sentiments on the rupee and, in tandem with improvements in the BoP position, led to a sharp correction in the exchange rate and a net accretion to reserves in 2013-14.

Trade deficit policy response: import restrictions and capital flow measures stabilized the exchange rate and reserves. Regulatory and fiscal measures addressed a large trade deficit and capital outflows by restricting non-essential imports and raising customs duties on gold and silver, while augmenting capital inflows through quasi-sovereign bond issuance and liberalized external commercial borrowings. The central bank established a special swap window for FCNR(B) and banks' overseas borrowings to mobilize one-off foreign currency inflows, which together helped arrest negative market sentiment, correct the exchange rate and improve the balance of payments with net reserve accretion.