Exchange Rate Interventions

*[Samuel Economics Notes: IDR Intervention]* _5 April 2025_ ■ To stabilize the Indonesian Rupiah (IDR), which is currently under pressure and trading between IDR 16,800 to 17,000 per USD, we propose a targeted monetary intervention aimed at bringing the exchange rate down to the IDR 16,400 level. Based on impulse response function (IRF) analysis, it is estimated that every USD 1 billion of foreign reserve injection can appreciate our local currency by approximately 100 IDR points. This analysis further shows that the effect is most potent in the early periods following the shock and persists over time, albeit with diminishing magnitude. This suggests that foreign exchange interventions can be an effective tool to manage IDR volatility in the short-to-medium term. ■ To achieve 500-point appreciation from IDR 16,900 to the target level of IDR 16,400, Bank Indonesia would need to inject approximately USD 5 billion into the foreign exchange market. A two-phased strategy is advisable. In the first phase (April), an immediate injection of USD 2 to 3 billion would serve as a strong signal to markets, anchoring expectations and reducing speculative pressures. The second phase (May) would involve a follow-up injection of USD 2 billion, contingent upon observed market developments, macroeconomic indicators, and behavior of capital flows. ■ To sustain the intervention effort without compromising reserve adequacy, Bank Indonesia should also seek to reinforce its FX buffers by securing bilateral or multilateral swap lines. These arrangements will provide additional confidence to the market while preserving the central bank’s ability to respond to future external shocks. ■ Finally, while this intervention plan is based on empirical evidence, it must remain flexible and responsive to global market developments. Should external risks—such as further heightened trade war—increase, Bank Indonesia must be prepared to scale its interventions accordingly. Any further pressure on the IDR should be countered with a 25 basis point hike in the first semester of the year to ensure local currency stability. Fithra Faisal Hastiadi, Ph.D Senior Economist *SSI RESEARCH* (Disclaimer on)

In today's Business Standard , Arvind Subramanian, Josh Felman, and I discuss the implications of a significant shift in Reserve Bank of India (RBI)'s exchange rate policy. Although not formally announced, the RBI has effectively pegged the rupee to the dollar since late 2022. Maintaining this peg has come at a steep cost—approximately $200 billion in forex interventions over two and a half years, including $100 billion since September through spot and forward markets. Such a strategy, however, is not without risks. Exchange rate pegs tend to erode competitiveness and bind monetary policy to defending the currency rather than addressing domestic economic priorities. These vulnerabilities leave the rupee exposed. Should markets perceive it as overvalued or anticipate a shift in monetary focus, speculative pressures could mount, forcing a disruptive adjustment. The prudent course for the RBI is to allow a gradual depreciation of the rupee, bringing it closer to equilibrium value. This would free monetary policy to focus on pressing domestic needs while safeguarding India's hard-earned reputation for prudent macroeconomic management. Link to the article: https://lnkd.in/gU-uyqzR

“The world’s second-largest economy is about to move to monetary independence and in so doing it will destroy the current international monetary system. China needs to not just reflate its economy but to inflate away its debts. The country has one of the highest total non-financial debt-to-GDP ratios of any major economy, at 311 per cent of gross domestic product. While the debt burdens of most countries are shrinking relative to output, thanks to high nominal GDP growth, China continues to report rising debt-to-GDP. On the eve of the global financial crisis in December 2007, China’s total non-financial debts amounted to just 142 per cent of GDP. The time has come for the Chinese authorities to take the monetary levers to generate higher nominal GDP growth. This means allowing the exchange rate to adjust to the level of broad money growth necessary to reduce China’s burden. The current international monetary system ends when China assumes this full monetary independence.” “Since 1994, China has intervened to prevent the appreciation of its exchange rate particularly in relation to the US dollar. This intervention funded the purchase of developed world government debt securities, primarily US Treasuries, through the creation of local currency bank reserves. This forced buying, regardless of price, effectively decoupled the risk-free rate from the nominal growth rate in the developed world. The global monetary system created a persistent and artificially large gap between nominal growth rates and the discount rate, thus inflating asset prices and facilitating a rise in gearing. Developed world savers were partially freed from funding their own governments and turned instead to funding the private sector and pushing asset prices higher. The excess domestic liquidity created by PBoC foreign exchange intervention was channelled by the Chinese state banking system to fund investment and higher production at the expense of consumption.” “This state capitalism reduced the role that excess liquidity played in pushing up domestic prices and making China less globally competitive. In this way, China’s external surplus endured for much longer than it would have in a market system. While the decline in the renminbi exchange rate raises the spectre of exported deflation, the rest of the world is very unlikely to permit China to take an even larger share of global trade. The most likely reaction is the imposition of tariffs and a clearer drawing of a line between countries aligned with China and those who see their allegiances elsewhere. Developed world authorities are already being drawn into greater interventionism to ensure that the gross imbalances of the old monetary system, are unwound with minimal sociopolitical dislocation. This new global monetary system brings radical challenges for investors which they are ill equipped to navigate without a deep understanding of financial history.”

📈 USDVND rate is tightening, what's driving this trend and what's next? 🌐 USDVND rate is at 25,600 VND/USD, VND devalued -3.4% YTD. In the whole 2023, VND devalued -4.2% 💡 The primary reason for recent VND devaluation is interest rates. VND interest rates are at historic lows, even lower than the rates observed during the COVID-19 period. The gap between USD and VND interbank interest rates have remained positive since the start of 2023. Such low interest rates diminish the attractiveness of holding VND, thereby increasing the demand for USD. Recent factors including disparities in gold prices and heightened imports, have added to the pressure on VND. 🗺 When it comes to managing exchange rate volatility, there are typically two options: selling USD reserves or increasing VND interest rates. The experiences in Q3 2022 have underscored the limitations of selling USD reserves, as it often proves unsustainable and can deplete reserves rapidly. Therefore, the focus shifts to the second option: increasing interest rates.⚓ 🏛 To this end, SBV recently reintroduced Treasury bills, aiming to absorb excess liquidity from the banking system. The objective is clear: reduce liquidity to drive up VND interest rates and enhance the attractiveness of the currency, thereby stabilizing the exchange rate. This tactic mirrors actions taken in September 2023, when the State Bank issued 360 trillion VND worth of Treasury bills over seven consecutive weeks, effectively managing exchange rate fluctuations. 🤵 Industry insiders have predicted the need for interest rate interventions to stabilize the exchange rate. Indeed, Treasury bond yields and secondary market bond yields have both risen in recent weeks. 📊 However, the current scenario differs from that of September 2023. Economic growth was slow in 2023, the demand for imported goods decreased, leading to an increase in the trade surplus and a greater supply of USD. Looking ahead to 2024, an uptick in economic and consumption activities may reverse this trend, leading to increased import demand and a reduced trade surplus. Consequently, relying solely on interbank market instruments may prove insufficient. 💰 In such circumstances, it becomes imperative to increase savings interest rates, as was done in the third quarter of 2022. Despite the prevailing trend of lowering interest rates to stimulate growth, prioritizing exchange rate stability leaves little room for alternatives. 1️⃣ First and foremost, stabilizing the exchange rate must take precedence. 2️⃣ Secondly, it's crucial to note that increasing savings interest rates does not necessarily translate to an increase in lending interest rates. Supporting growth hinges on maintaining competitive lending rates. 📈 Given the evolving landscape, it wouldn't be surprising to witness an increase in VND savings interest rates in the coming months, potentially leading to a decrease in the net interest margin (NIM) of banks. 🏢

The myth of ineffective Japanese #FX intervention In light of this week's Japanese FX interventions, the predominant commentary seems to be that it's unlikely to 'work'. But it's important to keep in mind that if you are bidding #USDJPY because you are ‘fading ineffective Ministry of Finance (MoF) FX intervention’ (as it's not backed up by sufficiently hawkish #BoJ monetary policy), you are not just fighting the MoF, but also a short US rates position and a long #USD position when both uptrends look locally quite mature. The MoF is a smart operator, but not omniscient. In 2022, its first intervention on September 22nd came when USDJPY was establishing itself over 145 as US 10-year #yields reached 3.70%. USDJPY came down to 140 on the day, but was back at 145 within a week as US yields got to 4%. The second attempt came on October 21st (followed by another one on October 24th) – USDJPY had exceeded 151 as US yields reached 4.25. That turned out to be the local peak for US yields and also USDJPY. USDJPY fell 20 handles in two months as US yields fell 75bp. And even this week's drop from 160 was enough to wipe out roughly a year's carry gain Morale of the story: when the MoF intervenes, it doesn’t just care about the level or even the rate of change in the exchange rate (‘its volatility’). It knows that rates/rate differentials drive USDJPY and it intervenes when it sees some chance of a peak in rates. It doesn’t get it perfectly right, but its record is pretty good overall. We could get one more leg up in rates before a correction and a commensurate move in USDJPY but the risk-reward isn’t appealing. Let’s see what tomorrow’s payrolls and ISM services data show. And of course there are longer-term issues to discuss... TLDR: I think being long USDJPY at 154 is brave even if not as brave as at 160, and even if you think unilateral MoF intervention is ineffective.

Our paper "Intervening against the Fed" (with Naoki Yago and Alexander Rodnyansky) has been published in the Journal of Financial Economics! Using high-frequency data, we study how countries can protect themselves from the Global Financial Cycle triggered by the Fed. When the Fed tightens: Global financial conditions deteriorate—exchange rates depreciate, risk premia surge, capital flows reverse, and stock prices fall, especially for firms with US dollar debt. But when central banks "intervene against the Fed" by selling dollars: ✅ Exchange rates stabilize ✅ Risk premia remain contained ✅ Capital outflows are prevented ✅ Balance sheet effects on dollar-debt firms vanish Why this matters: Countries with large FX reserves can successfully insulate themselves from US monetary policy spillovers. A key contribution: We hand-collected daily foreign exchange intervention (FXI) data and are making this dataset publicly available for researchers. 📊 Public FXI dataset: https://lnkd.in/eWWAsjXZ 📄 Paper: https://lnkd.in/eff4ibvf

The key findings include: Despite multiple pledges over several years to introduce more market influence to the currency, the PBOC has continued intervening in the foreign exchange market on a regular basis. There has been more volatility in the exchange rate’s movement over time but little change in the underlying regime. The limited movement of the currency over the past twenty years has generally prevented the PBOC from using the exchange rate as an instrument to drive macroeconomic adjustments in China’s economy. Even when offered favorable macroeconomic conditions to change the exchange rate regime, the central bank and political leadership treaded cautiously, and made minimal progress in reform. The loss of policy credibility over the past twenty years has been severe. If the PBOC announced that they were floating the currency in July 2005, most market participants would have believed them. If the central bank made that same announcement today, virtually no one would believe it, given the persistence of intervention in the foreign exchange market over a long period of time. The current period of US dollar weakness offers a new opportunity for China to introduce new exchange rate reform….

RBI just delivered a 𝗽𝗼𝗹𝗶𝗰𝘆 𝘁𝗿𝗶𝗮𝗱: 𝗮 𝗿𝗲𝗽𝗼 𝗿𝗮𝘁𝗲 𝗰𝘂𝘁, 𝗢𝗠𝗢𝘀 & 𝗮 𝗨𝗦𝗗/𝗜𝗡𝗥 𝘀𝘄𝗮𝗽. What does it all mean?   India's inflation is at ~2.2%, GDP growth at 8% in H1 & the a rupee is hovering near INR 90   Here are the 𝟯 𝗸𝗲𝘆 𝘁𝗵𝗲𝗺𝗲𝘀 from RBI yesterday: 𝗥𝗲𝗽𝗼 𝗥𝗮𝘁𝗲 𝗖𝘂𝘁: –𝟮𝟱 𝗯𝗽𝘀 𝘁𝗼 𝟱.𝟮𝟱% Why cut? - Inflation is well below target (FY26 CPI cut to 2% from 2.6%) - Growth outlook strengthened (FY26 GDP raised to 7.3%) - Real borrowing costs had become too high vs inflation RBI wants faster policy transmission - lower EMIs, cheaper credit + stronger consumption This move clearly 𝘀𝗶𝗴𝗻𝗮𝗹𝘀 𝗚𝗿𝗼𝘄𝘁𝗵-𝗳𝗶𝗿𝘀𝘁   𝗢𝗠𝗢 𝗣𝘂𝗿𝗰𝗵𝗮𝘀𝗲𝘀: 𝗜𝗡𝗥 𝟭 𝗹𝗮𝗸𝗵 𝗰𝗿𝗼𝗿𝗲 𝗹𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆 𝗶𝗻𝗷𝗲𝗰𝘁𝗶𝗼𝗻 (Open Market Operations = RBI buys government bonds, which increases liquidity in the system (for the banks)) Why OMOs now? - FX interventions (to curb rupee volatility) drained banking liquidity - System liquidity was running at a tight INR 1.5 lakh crore surplus - lower than desired - OMO purchases directly inject durable liquidity and push down bond yields What it means: ➡️ Lower yields → lower borrowing costs for govt, corporates & banks ➡️ Better credit growth & smoother transmission of the rate cut   𝗨𝗦𝗗/𝗜𝗡𝗥 𝗕𝘂𝘆–𝗦𝗲𝗹𝗹 𝗦𝘄𝗮𝗽: $𝟱 𝗯𝗶𝗹𝗹𝗶𝗼𝗻, 𝟯-𝘆𝗲𝗮𝗿 𝘁𝗲𝗻𝗼𝗿 What is this? - RBI buys dollars now & sells them back after 3 years - injecting INR liquidity today Why this swap? - Liquidity-neutral FX intervention was creating tightness - The swap adds INR liquidity without signalling rupee support - RBI clarified: “It’s a liquidity tool, not to prop up the rupee.” Impact: ➡️ Smooths money-market rates ➡️ Helps counter the liquidity drain from USD sales ➡️ Supports rate-cut transmission without locking up reserves

Based on my analysis of recent macro, flow, and policy developments, I believe the Indian Rupee is likely to remain under pressure into 2026, with EUR/INR biased higher. This view is driven by a combination of external balances, central bank intervention dynamics, and relative monetary policy trends, rather than any short-term trading consideration. India has been among the weaker-performing Asian currencies in 2025 YTD, largely reflecting capital outflows and external trade pressures. Elevated US tariff rates on Indian exports have contributed to a widening merchandise trade deficit, which has weighed on the current account and reduced natural FX inflows. From a policy perspective, I believe the RBI’s recent pattern of FX intervention is an important signal. Over the past year, a significant amount of reserves has been deployed through spot and forward markets to smooth INR volatility. As reserves have declined from recent peaks, the incentive to rebuild FX buffers has increased. In my view, any meaningful re-accumulation of reserves would require sustained USD purchases, which could act as a structural headwind for INR. The RBI’s FX forward position also remains relevant. Although the short forward book has reduced from earlier extremes, upcoming maturities and potential rollovers imply continued dollar demand unless there is a sharp and sustained USD correction. In addition, reported intervention activity in offshore markets suggests that policy support for INR has become more tactical rather than unconditional. Recent price action further supports this interpretation. The RBI has shown a greater tolerance for INR depreciation during periods of broad USD strength, allowing USD/INR to move beyond previously defended levels. I believe this reflects a shift toward managing volatility rather than targeting specific exchange rate levels. On the flows side, pressures from a wider trade deficit and lacklustre portfolio inflows remain a concern. While market expectations for a US–India trade agreement have risen, I see a risk that eventual outcomes may disappoint if tariff reductions are more limited than currently anticipated. From a monetary policy standpoint, I believe a soft inflation trajectory into 2026 leaves room for further policy easing. With markets not fully pricing additional rate cuts, this divergence could continue to weigh on INR on a relative basis. Key risks to this view include India’s still-comfortable FX reserve adequacy and the potential for improved bond inflows if India is included in major global bond indices, which could provide episodic support to the currency.

Over the past two years, Pakistan has been artificially managing the rupee. The State Bank has relied on heavy interventions, import controls, administrative measures, and restrictions on dollar access to keep the exchange rate within a “comfortable” band. These policies created an illusion of stability, but at the cost of squeezing businesses, distorting trade flows, and undermining investor confidence. But what would the rupee look like if it were truly free-floating today? Based on competitiveness (REER) and market fundamentals, the evidence points to a short- to medium-run fair value in the PKR 290–305 per USD range. Why this matters: The current interbank rate (~PKR 283–285) is only slightly below that “fair” band, showing how policy controls are keeping the rupee marginally stronger than where pure market forces might push it. Interest rate parity also suggests a natural path toward ~PKR 300 over the next year, given Pakistan’s much higher domestic rates relative to the US. This range reflects what trade competitiveness and capital flows justify, unlike the artificially compressed rate of recent months. The takeaway: A gradual shift to a transparent free float, supported by credible monetary and fiscal policies, would align the currency with fundamentals, reduce distortions, and restore investor confidence. #PakistanEconomy #PKR #Forex #Policy #EmergingMarkets