Since 2014,there have been constant debates about whether the central bank should step into the market and use its foreign exchange reserves to deal with the unprecedented pressure on the currency from capital outflows. Some observers have insisted that there was no use to employing foreign exchange reserves to combat currency depreciation expectations. Such arguments were based on the failure of several Southeast Asian countries in protecting their currency during the Asian financial crisis of 1997-1998. However,if we never use our abundant foreign exchange reserves,what's the point of accumulating them?

Having the ability to respond to concentrated capital outflows and reassure nervous markets are key reasons for accumulating foreign exchange reserves. This capacity can protect the real economy from the shock of foreign exchange rate gyrations. Having a firm attitude towards using foreign exchange reserves is related directly to the market's trust in the central bank. If investors believe the central bank is determined to stabilize the market,can market panic be dispelled. If that goal is accomplished,capital flight pressures will gradually ease and the foreign exchange market will eventually return to more normal operations.

Conversely,if the central bank hesitates in taking action,it may encounter attacks on the currency from within the country as well as abroad. That may lead to continued market panic and loss of control over the exchange rate. Ultimately,that could mean the loss of foreign exchange reserves. Even if the central bank eventually finds the resolve to use its reserves to control market volatility,it will end up having to pay a much higher price to achieve the same goal. And once people panic over possible devaluation and there is huge demand for foreign exchange purchases,it may be impossible to win confidence back and satisfy that demand.

Stabilizing Sentiment