The Effectiveness of Central Bank Intervention in the Foreign Exchange Market: Evidence from India

Kaladhar, Topunuru and K P, Prabheesh (2014) The Effectiveness of Central Bank Intervention in the Foreign Exchange Market: Evidence from India. Masters thesis, Indian Institute of Technology, Hyderabad.

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Abstract

This thesis empirically analyzes the effectiveness of RBI intervention in the foreign exchange market. The study framed two objectives related to the central bank intervention. The first objective deals with analyzing the effectiveness of RBI intervention on exchange rate level and volatility. And the second deals with the relevance of asymmetric intervention on exchange rate level and volatility. Using monthly data from July 1995 to July 2013 and GARCH methodology, the thesis empirically estimates two models. First model estimates the effect intervention on the exchange rate level and volatility by measuring intervention as net purchases of US dollar by the RBI. In second model included both purchases and sales of US dollar as a proxy the intervention to analyze the effect of asymmetric intervention on exchange rate level and volatility. The empirical findings suggest that the RBI intervention is not effective in influencing the level of Rupee/USD exchange rate. However, the study found that the RBI intervention is effective in reducing the volatility. The empirical findings also show that intervention by purchase of USD by RBI significantly reduces volatility whereas intervention by sales significantly increases volatility in exchange rate. These findings confirm the asymmetric effect of intervention in exchange rate volatility in the Indian context.

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