hmmmm, good question.. well, I didn't exactly say that central banks' intervention/involvement in the forex market is not a preferred way to go about for stabilizing a currency...what I indeed meant was that it is kept at a possible minimum under the "flexible exchange rate system" - which calls for the value of any given currency to be determined in open markets by the forces of demand and supply... it follows the same line of logic as a free market economy wherein prices of commodities are set in the open market..
the main purpose of the central bank's intervention into forex market (under the floating system <--- key point) is <link rel="File-List" href="file:///C:%5CUsers%5CNauman%5CAppData%5CLocal%5CTemp%5Cmsohtmlclip1%5C01%5Cclip_filelist.xml"><link rel="themeData" href="file:///C:%5CUsers%5CNauman%5CAppData%5CLocal%5CTemp%5Cmsohtmlclip1%5C01%5Cclip_themedata.thmx"><link rel="colorSchemeMapping" href="file:///C:%5CUsers%5CNauman%5CAppData%5CLocal%5CTemp%5Cmsohtmlclip1%5C01%5Cclip_colorschememapping.xml"><style> </style>not to reverse a change in the value of currency, but to save it from undue and excessive short-run speculative pressure (e.g. people selling too much of a currency in the short run to avoid losses) i.e. if market conditions are volatile or if there's uncertainty of any sort in the market, such as the ongoing greek sovereign debt crisis posing threat to the Euro or the bearing of a hung parliament in the recent UK elections on pound sterling etc. etc...
too much intervention on the part of any central bank wouldn't be advisable on a number of grounds, but what I can think of now as the possible negatives are that first; in the process of doing so, the bank surrenders precious foreign exchange holdings, and second; it would put an upward pressure on the cash rate which then in turn would affect the long-term interest rates, giving rise to lower private business investment and consumer spending, which would then slow down economic growth/activity ultimately giving rise to higher unemployment.. phewwww you see, in macro economics every aspect of the economy is related and has economy wide knock-on effects if tinkered with.. you try to fix one thing in one part of the economy and something somewhere else goes out of whack
As far as I believe, what SBP was doing under the previous regime was that it was actively following a fixed exchange rate system and was effectively buying off its own currency with foreign money that had been borrowed from the IMF :-# not a very good thing to do... I dont really know if pakistani rupee is floated or still fixed..
and then there are certain other countries which deliberately hold the value of their currency low, so as to facilitate their exports based economy, such as Choinaa..!
The main challenge remains for central banks (through the use of their monetary policy) and governments (through fiscal policy) to strike the perfect balance between different aspects of the economy and try to keep inflation at a minimum low (through a combination of both monetary and fiscal measures) without unduly compromising economic growth..
and wow..! pashto and punjabi has at the very least one word in common.. i.e. "Da" ..LoL!