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Central Bank Intervention in USD/INR Market: Estimating Its Reaction Function and Impact on Volatility

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  • Smita Roy Trivedi

    (National Institute of Bank Management (NIBM))

  • P. G. Apte

    (Narsee Monji Institute of Management Studies)

Abstract

Econometric evidence on why central banks intervene in the foreign exchange market and the impact of such intervention has remained inconclusive. We contribute to the literature with evidence from India, a managed float regime that sees consistent monitoring and intervention by Reserve Bank of India, India’s central bank. Estimation of the central bank reaction function shows that increased volatility in the foreign exchange market and misalignment from targeted rates are important objectives behind intervention. The paper further uses the GARCH framework to study how intervention influences exchange rate volatility. We find that intervention in the spot market increases volatility while that in the forward market reduces volatility.

Suggested Citation

  • Smita Roy Trivedi & P. G. Apte, 2016. "Central Bank Intervention in USD/INR Market: Estimating Its Reaction Function and Impact on Volatility," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(3), pages 263-279, September.
    • Handle: RePEc:kap:apfinm:v:23:y:2016:i:3:d:10.1007_s10690-016-9218-6
    DOI: 10.1007/s10690-016-9218-6
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    References listed on IDEAS

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    Cited by:

    1. Smita Roy Trivedi, 2020. "The Moses effect: can central banks really guide foreign exchange markets?," Empirical Economics, Springer, vol. 58(6), pages 2837-2865, June.

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    More about this item

    Keywords

    Central bank intervention; Exchange rate volatility; Foreign exchange markets; GARCH analysis; Intervention reaction function;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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