Countries are flexibly managing exchange rates as an important tool in monetary policy, aiming to control inflation, support growth, and limit the spillover effects from external economic shocks.
Singapore operates a monetary policy centered on the exchange rate
Singapore is one of the few economies that conducts monetary policy primarily through the exchange rate, rather than using interest rates as the central tool. This approach has been maintained for many years by the Monetary Authority of Singapore (MAS), the country’s central bank, to support economic growth and control inflation, especially imported inflation in a highly open economy.
The focus of the policy framework is the nominal effective exchange rate of the Singapore dollar against a basket of currencies (S$NEER). MAS does not peg the SGD to a specific foreign currency but allows the exchange rate to move within an undisclosed policy band, adjusting its stance through the band’s parameters. This method helps the exchange rate reflect underlying economic conditions while avoiding sharp fluctuations that could disrupt prices and business operations.
According to analysis by the Bank for International Settlements (BIS), Singapore’s economy is heavily dependent on trade and imports, making exchange rate fluctuations quickly transmit into domestic prices. The BIS argues that the basket-based management mechanism with a fluctuation band helps reduce external inflationary pressures while creating a more stable environment for trade and investment.
Assessments by the International Monetary Fund (IMF) also show that the pass-through from the exchange rate to inflation in Singapore is significant. The IMF notes that using the exchange rate as the main policy tool has helped Singapore effectively control inflation during periods of strong global volatility in energy, food, and transportation costs, when external shocks easily spread to the domestic economy.
Currently, MAS manages the exchange rate through three main parameters of the S$NEER band. The first is the slope, indicating the trend of the Singapore dollar gradually appreciating or depreciating over time. The second is the midpoint, which can be adjusted when the economic landscape changes significantly. The third is the width of the band, allowing the exchange rate to fluctuate within a certain limit to absorb short-term market volatility. Thanks to this management approach, Singapore can flexibly support economic growth while maintaining control over inflation.
Recent policy decisions reflect Singapore’s cautious approach. In a context of stable economic growth while inflation risks have not completely disappeared, the Monetary Authority of Singapore (MAS) decided to maintain the current stance of the exchange rate, leaving the fluctuation band and the reference level of the S$NEER unchanged. This approach helps the market avoid sudden volatility while allowing policymakers to retain room for policy adjustment if price pressures increase in the future.
India flexibly regulates the exchange rate within an inflation control framework
India manages the rupee exchange rate under a “managed float” mechanism, where the market plays the decisive role in the main trend, and authorities intervene only when fluctuations become too strong and risk spilling over into inflation and economic stability.
In this approach, inflation control is the central focus, guiding decisions related to the exchange rate and foreign exchange market operations.
The most important foundation of the policy is the inflation targeting framework. The Reserve Bank of India (RBI) states that the Indian government maintains an inflation target of 4%, with a permissible band of 2-6% for the period from April 2021 to March 2026. Setting such a clear target helps anchor inflation expectations, thereby allowing the RBI to avoid overreacting to short-term rupee fluctuations and focus on the goal of domestic price stability.
On that basis, the RBI manages the exchange rate to limit sudden spikes in volatility rather than pursuing a specific rupee level. International assessments indicate that India’s foreign exchange interventions primarily aim to smooth out fluctuations deemed excessive, rather than steering the exchange rate to a fixed level. The International Monetary Fund (IMF) notes that these measures focus on reducing sharp volatility in the foreign exchange market, thereby contributing to rupee stability while preserving market-driven mechanisms.
To achieve this goal without directly selling foreign exchange reserves, the RBI also uses technical tools. One measure
