Asian central banks from India to South Korea said they’re ready to offset market volatility that has swept the region and sent stocks and currencies sharply lower.
The comments came as all major Asian markets dropped on Monday, with share prices falling the most since 2007 in China. Much of the selling pressure is being blamed on China’s ongoing slowdown and its sudden move on Aug. 11 to change its exchange rate regime, triggering the yuan’s biggest loss in two decades.
“The stock market turmoil itself is not the main problem but the fact that it is coming along with rapid depreciation of the currencies,” said Alicia Garcia Herrero, Chief Asia Pacific Economist at Natixis.
Reserve Bank of India Governor Raghuram Rajan said it isn’t the role of central banks to support stock markets, but signaled a willingness to intervene to prop up the rupee.
“We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee,” Rajan said. “Once market volatility settles down, India should emerge once again as an investment destination of choice.”
In South Korea, policy makers pledged action to stabilize financial markets amid tension with North Korea that is raising concern over capital outflows and volatility. The Bank of Korea said Monday that efforts to calm markets are important, adding that it will closely monitor external risks and come up with measures to mitigate them if needed.
South’s President Park Geun Hye asked officials to monitor markets and prevent “nervousness” related to North Korea risks from spreading.
Some policy makers have already taken action. Vietnam earlier this month devalued the dong for the third time this year and widened the currency’s trading band, saying it took the decision in response to China’s move.
Still, not all central banks and governments have signaled a willingness to intervene. Bank Indonesia Governor Agus Martowardojo said in Jakarta on Monday that he won’t follow others either in “competitive devaluation” of the rupiah nor in “revaluating” it.
“We are committed to maintain financial stability and exchange-rate stability. We don’t immediately follow competitive devaluation done by other countries,” Martowardojo said.
Similarly, Philippine Finance Secretary Cesar Purisima on Sunday cautioned that using exchange rates to boost growth may trigger competitive devaluations across region.
The pressure on Asia’s currencies comes even as traders pare back expectations that the U.S. Federal Reserve will hike interest rates this year for the first time since 2006. The Fed funds futures now show the probability of a December move at 55 percent compared with 61.1 percent on Friday and down to 28 percent for September from 34 percent.
Central bankers and finance ministers from the Group of 20 meet in Turkey next week. One item for discussion will be further clarity on the outlook for U.S. borrowing costs.
“The more transparency we can get from the U.S. Federal Reserve and Janet Yellen in particular, the more it will help to address some of the volatility in global stock markets,” Australia Treasurer Joe Hockey told reporters in Sydney Monday.
Chinese stocks tumbled by the most since 2007, with the Shanghai Composite Index closing 8.5 percent lower. The MSCI Asia Pacific Index fell for a seventh straight day, credit risk in Asia increased to the highest since March 2014, and the region’s currencies also weakened.
The currency rout is pressuring policy makers across Asia to intervene. Weaker currencies triggers capital flight as investors pull their money out and also drives up the cost of servicing foreign-currency debt.