In the world of economics and macroeconomics, a currency crisis is ultimately seen as a confidence crisis. When faith in an economy weakens, capital flees, exchange rates spiral, and currencies nosedive. That is precisely why, when currencies come under severe pressure, central banks across the world step in to arrest the decline — not merely to defend an exchange rate, but to restore confidence.
It would not be hyperbole to say that modern central banking increasingly embraces the “whatever it takes” doctrine, first articulated by Mario Draghi, then president of the European Central Bank, during the height of the eurozone crisis in 2012.
The Draghi Moment: When words saved a currency
At the peak of the euro crisis in 2012, the eurozone was on the brink of collapse. Investors were openly betting on a breakup of the single currency. Sovereign bond yields in countries like Greece, Spain, and Italy were spiralling, and massive capital flight was underway.
Speaking at a conference in London, Draghi delivered what would become the most consequential central bank statement of the modern era.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
Remarkably, markets stabilised almost instantly. Bond yields fell, the euro recovered and speculative bets against the currency unwound without the ECB immediately spending a single euro. The power of the statement lay in the credibility of the institution behind it.
That episode established a template for central banks globally: credibility, backed by capacity, can halt a currency crisis even before reserves are deployed.
Japan: Direct and decisive FX intervention
One of the most visible examples of direct FX intervention came from Japan. In 2024, as the yen slid to a 38-year low of around 162 to the dollar, Japanese authorities stepped in forcefully.
The Bank of Japan, along with the Ministry of Finance, sold dollars and bought yen directly in the market, spending tens of billions of dollars from its foreign exchange reserves. The intervention triggered a sharp rebound in the yen, even if the impact proved temporary.
Japan’s motivation was clear: a rapidly weakening yen was fuelling imported inflation, raising energy costs and eroding household purchasing power. The intervention signalled that authorities would not tolerate disorderly currency moves, even if they accepted longer-term depreciation driven by fundamentals.
In 2022, the UK faced its own currency shock. Following the government’s unfunded “mini-budget,” which proposed nearly $45 billion in tax cuts, markets lost confidence in Britain’s fiscal credibility. The pound crashed to a record low against the dollar.
The Bank of England intervened but not primarily through the FX market. Instead, it launched emergency bond-buying operations to stabilise the gilt market, which had come under severe stress.
By restoring order in the bond market and signalling policy credibility, the BoE indirectly stabilised the pound. The episode underscored an important lesson: currencies can be defended not only through reserves, but through restoring trust in a country’s macro framework.
China’s quiet and controlled intervention
China offers a very different model. The People’s Bank of China does not allow its currency to freely float. Instead, it manages the yuan through a daily fixing mechanism.
When depreciation pressures intensify, Chinese authorities typically act through state-owned banks, which sell dollars and buy yuan in both onshore and offshore markets. Capital controls are tightened, liquidity conditions adjusted, and messaging carefully calibrated.
China’s interventions are often deliberately opaque, aimed at slowing currency weakness without triggering panic or encouraging speculative attacks.
India: Why the RBI Is not defending a level
This global context becomes especially relevant as the Indian rupee continues to weaken, recently crossing the 92-per-dollar mark. The obvious question then arises: why is the RBI not stepping in aggressively, as other central banks have done?
The answer lies in policy philosophy.
The Reserve Bank of India does not defend a specific exchange rate. Instead, it intervenes only to smooth excessive volatility. RBI’s framework allows the rupee to adjust to global forces such as dollar strength, oil prices, and capital flows, intervening only when moves become disorderly.
India also enjoys strong buffers: ample forex reserves, manageable external debt, and relatively stable capital flows. Unlike crisis-hit economies, the rupee’s decline so far reflects global dollar strength rather than domestic macro stress.
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