Currency interventions offer limited benefits beyond the short term,
and national exchange rates should be allowed to adjust to global shocks, a senior official from the International Monetary Fund (IMF) stated on Wednesday.
Krishna Srinivasan, Director of the IMF’s Asia and Pacific Department, said at a press conference in Mumbai that countries that allow their exchange rates to fluctuate freely tend to fare better.
He noted that exchange rates should act as a shock absorber—the first line of defense—when economies face recurring global shocks.
Central banks across Asia are grappling with the weakness of their national currencies as global upheavals trigger capital outflows and drive up demand for the U.S. dollar.
Regulators from Indonesia to Japan have resorted to a combination of interest rate hikes and currency interventions.
In India, the Reserve Bank of India (RBI) is mounting its most aggressive defense of the rupee since the "taper tantrum" of 2013.
The Indian currency has been one of the worst performers in Asia this year, weighed down by high oil prices and persistent foreign capital outflows from the Indian stock market.
This month, the Reserve Bank introduced a special window to meet the dollar demand of state-run oil companies, as well as a new requirement for banks to hold cash reserves against certain foreign exchange transactions. These steps followed the central bank’s first interest rate hike in nearly four years.
The IMF drew a distinction between interventions in the foreign exchange market and measures aimed at managing capital flows. Ranil Salgado, the IMF’s senior resident representative for India, Bhutan, and the Maldives, described the Reserve Bank’s recent moves to facilitate foreign capital inflows as generally positive. "We believe this is a sensible policy," he noted.
The central bank has eased rules on external borrowing and introduced incentives to attract foreign currency deposits from Indians living abroad.
These measures have brought in billions of dollars, helping to alleviate pressure on the rupee without relying exclusively on the Reserve Bank’s reserves.
Salgado pointed out that the Reserve Bank’s official policy is to curb excessive currency volatility, rather than to defend any specific exchange rate level.