The only lasting solution to our external sector problem is to reduce the CAD to its sustainable level and to finance the reduced CAD through stable, and to the extent possible, non-debt flows. Reducing the CAD requires structural solutions – RBI has very little policy space or instruments to deliver the needed structural solution. They fall within the ambit of the government.
Structural adjustment will also take time. In the interim, we need to stabilize the market volatility, a task that falls within the domain of the Reserve Bank. 34. It is the avowed policy of the Reserve Bank not to target a level of exchange rate and we have stayed true to that policy.