Definition
Speculative Attack
A speculative attack is a sudden mass selling of a currency by traders betting a peg or managed level cannot hold, which can force a devaluation when reserves are exhausted.
When markets doubt a central bank's ability to defend a currency, speculators sell it heavily, forcing the bank to spend reserves buying it back. If reserves run dry, the peg breaks and the currency collapses, as in the 1992 attack on the British pound and the 1997 Asian crisis.
India's 1991 crisis saw reserves fall to weeks of import cover, contributing to rupee devaluation and economic reform. Large forex reserves today serve partly as a deterrent, signalling the RBI's firepower to defend against speculation.
Related terms
- Forex ReservesForex reserves are the foreign-currency assets and gold the RBI holds to manage the rupee, pay for imports and meet external obligations during stress.
- Devaluation vs RevaluationDevaluation is an official lowering of a fixed or pegged currency's value, and revaluation an official raising; both are deliberate government acts, unlike market depreciation or appreciation.
- Currency PegA currency peg fixes a currency's exchange rate to another currency or basket, requiring the central bank to buy or sell reserves to defend the chosen level.
- Balance of Payments (BoP)The balance of payments records all economic transactions between India and the rest of the world over a period, spanning trade, services, income and capital flows.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.