Asia central banks deploy forex reserves to help prop up currencies

China's central bank has also lowered some key lending rates amid efforts to offset the impact of Beijing's Covid-19-zero stance. PHOTO: REUTERS

MUMBAI (BLOOMBERG) - Asia's emerging economies are drawing on large foreign exchange reserves to help prop up their currencies rather than going all-out with interest rate hikes.

India, Thailand and Korea have seen their reserves drop by a combined US$115 billion (S$158.7 billion) this year as they sold US dollars to curb currency declines. While most central banks in Asia are also raising rates, economists see this aimed more at tamping down inflation than narrowing the rate differential with the United States Federal Reserve.

The hope in the region is that a relatively slow and shallow hiking cycle will be enough to keep a lid on price gains without sending economies into reverse.

"Emerging-markets Asia central banks are arguably less willing to indulge in competitive hikes," said Mr Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. "The build-up of FX (foreign exchange) reserves provides some scope for these central banks to exploit this as a means to backstop currencies and contain imported inflation."

China, the biggest emerging market of all and the top-ranked nation for currency reserves, remains on a different course to the rest of region. Its reserves have fallen by US$179 billion this year to US$3.07 trillion, but the central bank has also lowered some key lending rates amid efforts to offset the impact of Beijing's Covid-19-zero stance.

"Many Asian central banks have accumulated foreign reserves during periods of capital inflows and low US interest rates, which can now be drawn upon," said economist Chua Hak Bin at Maybank Investment Banking Group. "Maintaining currency stability is important to shoring up economic confidence and lowering the threat to exporters and borrowers, especially for smaller, more open economies."

To be fair, almost no economy in the world has been spared the impact of the US dollar's relentless rise, but emerging Asia currencies have held up well on a relative basis and despite a reticence to push hard on policy rates.

India has run down its reserves by US$62 billion this year, while raising its benchmark interest rate by just 90 basis points. Even with an expected 50-basis point hike by the Reserve Bank of India (RBI) on Friday (Aug 5), this will still be well short of the 225 basis points of increases by the Fed.

The rupee has dropped to a series of record lows during the period, but has managed to hold its place in the top half of the field for year-to-date performance among currencies in the region.

Lower rates and renewed appeal for equities and the tech sectors in India and South Korea should help the rupee and the won, said Mr Ashish Agrawal, head of FX and emerging markets macro strategy research at Barclays in Singapore.

South Korea, which began raising rates 12 months ago but let itself fall behind the Fed this year, has seen a near US$25 billion drop in reserves. The won is down more than 9 per cent since the beginning of January and has hit levels seen last seen in 2009.

Thailand has seen US$28 billion of depletion in its reserves, while maintaining rates at a record low and seeing the baht drop 8 per cent to the lowest since 2006. The Philippines, Indonesia and Malaysia have also seen a drop in their reserves this year.

To be sure, reserves are not made up entirely of US dollars and part of the reserve decline across countries reflects the drop in the value of other reserve currencies against the greenback, not just market intervention.

Policymakers have also looked beyond both reserves and rate hikes to support their currencies. The RBI has eased rules to attract more dollar inflows from non-residents and foreigners into its debt. South Korea has asked its National Pension Service for more active hedging when investing abroad.

"Rates hikes don't always work in currency defence," said Ms Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings. "So central banks are using a mix of allowing some depreciation and expending FX reserves."

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