Money Market and Bond
In a bid to maintain financial stability and ensure effective monetary policy implementation, the Bank of Thailand conducts Open Market Operations (OMOs) to keep short-term interest rate in the money market in line with the policy interest rate set by the Monetary Policy Committee. The OMOs, the most actively used Monetary Policy Instruments, consists of:
- Bilateral Repurchase Operations
- Bank of Thailand Bond Issuance
- Foreign Exchange Swap
- Outright sale/purchase of securities
Besides being a tool to enhance the BOT’s flexibility and efficiency in money market liquidity management, the BOT bond issuance also links with the BOT’s attempt to curb baht volatility. Whenever the BOT purchases foreign currencies to mitigate baht fluctuation, international reserves would rise and the similar amount of baht supply would automatically be injected into the financial system. To ensure that additional money supply does not affect money market interest rate and inflation, the BOT needs to conducts monetary sterilization by issuing BOT bond to mop up baht liquidity from the financial system. Following years of repeated actions in the foreign exchange market, the BOT has issued an enormous amount of BOT bond.
The BOT supervises and manages the auction of government debt securities in the primary market while it also acts as a registrar and paying agent for both interest and principle of the debt instruments. The BOT has developed the Bangkok Interbank Offered Rate (BIBOR) and the Private Bilateral Repo to widen and deepen the country’s money market. The BOT has also joined hands with the Ministry of Finance and other relevant agencies on debt market development initiatives such as the development of government debt issuance in the primary market, improvement of liquidity and efficiency in the secondary market, and development of settlement infrastructure for debt securities market.
Most of the government’s debt securities are sold to financial institutions through Debt Securities Auction at predetermined Auction Schedule. To grant opportunities for the general public to invest in low-risk government debt securities when deposit rates were excessively low, savings bonds have been offered for public subscription at times. These bonds include the Ministry of Finance’s Savings Bonds and The Bank of Thailand’s Savings Bonds.
Foreign Exchange Market
The Bank of Thailand has adopted the managed float exchange rate regime, letting the baht reflect economic conditions and allowing market forces to determine value of the baht without fixing the exchange rate at any particular level or with any single foreign currency.
As the current economic structure becomes much more complex and connected a great deal with global economies, exchange rate tends to be more volatile and private operators need to cope with increasing baht fluctuation by hedging against foreign exchange risks and enhance their business competitiveness. A number of hedging tools have been developed to shield them from risks of foreign exchange exposures such as FX forward and FX swap transactions.
The BOT has in recent years stated clearly its policies to accommodate offshore investment by Thai investors or business operators through easier rules and regulations. The move is aimed to encourage more business and investment network expansion to other countries and, at the same time, offset the impact of persistent capital inflows and naturally reduce appreciation pressures on the baht.
In case of excessive baht volatility that jeopardizes the overall economy or should there be any sign of baht speculation by so-called ‘hot money’, the BOT stands ready to step in the FX market and take appropriate actions as necessary. The BOT takes into consideration the Nominal effective exchange rate (NEER), which comprises currencies of key trading partners and competitors, not just the US Dollar. In any case, the BOT ensures that its actions in the market do not contradict the country’s economic fundamentals, which would otherwise lead to further imbalances.
Moreover, the BOT has also imposed Measure to Prevent Thai Baht Speculation, which it could consider tweaking the intensity of measures to suit market situation at times.
With the BOT’s constant actions to tackle excessive baht volatility, International Reserves keep on rising. The BOT is responsible for managing the country’s international reserve and it applies three core principles in reserve management, which are security, liquidity, and return.
Most of the BOT’s international reserves are invested in secured and low-risk foreign securities such as monetary gold, deposits at international financial institutions, government bonds of highly-credible developed countries, and special drawing rights (SDRs) at the International Monetary Fund.
Interesting issues for academic scholars and students regarding the financial markets:
- Foreign Exchange Transaction
- Exchange Control Regulations in Thailand
- Introduction to Government Debt Securities
- Financial assistance to priority economic sectors
- Market development