Speculative Attack

## What it is A speculative attack is a coordinated wave of selling against a currency by traders and funds who believe the central bank can no longer defend its exchange rate. The attackers short the currency — borrowing it to sell, hoping to repay cheaply after it falls. To hold the rate, the central bank must sell foreign-exchange reserves to buy its own currency and/or raise interest rates sharply. If reserves deplete or the rate-defence becomes too painful, the peg breaks and the currency devalues — handing profits to the attackers.

## Classic episodes The textbook case is George Soros breaking the Bank of England in 1992, when his fund shorted the pound and forced sterling out of the European Exchange Rate Mechanism. The 1997 Asian Financial Crisis saw a cascade of attacks on the Thai baht and other pegged Asian currencies once investors judged reserves inadequate.

## The Indian context India runs a managed float, not a hard peg — the RBI does not target a fixed rupee level but intervenes to smooth volatility. This flexibility is itself a defence: there's no single line to "break." India's other buffers are large: foreign-exchange reserves of around $650–700 billion (among the world's biggest), capital controls that limit hot-money speculation, and an RBI willing to sell dollars and tighten liquidity. India did face acute rupee pressure during the 2013 "taper tantrum," which the RBI countered with special NRI deposit schemes and rate action rather than collapsing.

## Why it matters to investors A speculative attack — or even the fear of one — drives sharp rupee depreciation, which hurts importers, FPI-heavy sectors and companies with unhedged foreign debt, while helping exporters (IT, pharma). It can trigger FPI outflows from Indian equities and bonds, pushing yields up and stocks down.

Takeaway: India's flexible exchange rate, deep reserves and capital controls make a successful peg-breaking attack unlikely — but rupee volatility from global risk-off episodes is real. Investors with global exposure or unhedged forex liabilities should watch RBI reserve levels and intervention, since these are the front line of the rupee's defence.