A Switchover to a Floating Exchange Rate will Permit the Ruble to Find a New Equilibrium
From November 5, 2014, with the ruble value of the bi-currency basket amounting to the limits of the operating interval the volume of interventions by the Central Bank of Russia will not exceed $350m a day. In addition to the above, an intervention by the regulator will be possible only in case of the bi-currency basket's value being at the limits of the interval or beyond it during the entire trading session. So, fr om now on the Central Bank of Russia will not react to short-term swings of the exchange rate.
It is to be noted that only the rule under which the limits of the operating interval shift automatically by 5 kopecks in case of a cumulative value of currency interventions amounting to $350m remains unchanged.
In addition to the above, the Central Bank of Russia took a decision to introduce from November 5 a new instrument, that is, a REPO in foreign currency for the term of 12 months. It is to be reminded that such operations for the term of 28 days and 1 week started late in October, however, they were not quite popular. Due to the above, the Central Bank of Russia extended the period of lending to 1 year and reduced the interest rate to the level of LIBOR (for the relevant period) plus 1.5 p.p. Earlier, the rates amounted to LIBOR plus 2 p.p. and LIBOR plus 2.25 p.p. for operations for the term of 1 week and operations for the term of 28 days, respectively.
The above decisions are aimed at achieving a higher flexibility of the process of the exchange rate formation. Considerable currency interventions carried out by the Central Bank of Russia of late failed to stabilize the exchange rate of the ruble.
The abandonment of sales of foreign currency out of the international reserves permits the ruble to find a new equilibrium in a shorter period of time. It is to be noted that foreign currency REPO operations will be the source of the required currency funds for credit institutions.
Also, the Central Bank of Russia has reserved the right to carry out currency interventions if the financial stability is under threat. Such a vague wording does not actually lim it the ability of the Central Bank of Russia to carry out interventions, however, at present, market players cannot forecast accurately when and in which volume such interventions take place. It permits the Central Bank of Russia to carry out them more effectively.
Pavel Trunin, PhD (Economics), Director of the Center for Macroeconomics and Finance,
Аnna Kiyutsevskaya, PhD (Economics), Senior Researcher