Forex intervention
Also called: Currency intervention · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Forex intervention is a central bank buying or selling foreign currency to influence the exchange rate or reduce sharp swings.
- To stop the home currency from falling, the central bank sells dollars from its reserves.
- To stop it from rising too fast, it buys dollars and adds them to its reserves.
Intervention is the defining feature of a managed float, where official reserve transactions are not zero. RBI says its aim is to curb excess volatility, not to target a particular level. It uses spot deals, forward deals and buy-sell swaps.
Example
India's foreign exchange reserves peaked at about US$705 bn in September 2024. They then fell as RBI sold dollars to defend the rupee against pressure. When RBI buys dollars, it releases rupees into the economy. It then often absorbs the extra rupees through open market operations, which is called sterilisation.
Don't confuse with
- Devaluation: a formal government decision to change a fixed rate. Intervention works through market trades, without announcing a new official rate.
Related concepts
- Fixed exchange rate
- Devaluation
- Revaluation
- Black market for foreign exchange
- Speculative attack
- Managed floating
- Crawling peg
- Currency board
- Impossible trinity
- Competitive devaluation