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Relationship between Exchange Rate Volatility and Central Bank Intervention

Author

Listed:
  • Harendra Behera

    (Harendra Behera is with the Department of Economic Analysis and Policy, Reserve Bank of India, Sahid Bhagat Singh Road, Mumbai-400 001, India. Email: hbehera@rbi.org.in)

  • Vathsala Narasimhan
  • K.N. Murty

    (Vathsala Narasimhan and K.N. Murty are with the Department of Economics, University of Hyderabad, Hyderabad-500046, India. Email: vnss@uohyd.ernet.in and knmss@uohyd.ernet.in)

Abstract

In a world of high capital mobility, several risks are emerging in the financial markets and the Central Bank intervention has played an important role in managing these risks. In India, the Reserve Bank of India (RBI) intervenes in the foreign exchange market to maintain orderly market conditions. This article empirically explores the relationship between Central Bank intervention and exchange rate behaviour in the Indian foreign exchange market. Specifically, the article investigates the effects of RBI intervention on exchange rate level and volatility. Using monthly data for April 1995 through December 2006 and GARCH (1,1) model, it is found that the intervention of the RBI is effective in reducing volatility in the Indian foreign exchange market instead of reversing trend movement of exchange rate. It is also observed that FII investments increase exchange rate volatility in India.

Suggested Citation

  • Harendra Behera & Vathsala Narasimhan & K.N. Murty, 2008. "Relationship between Exchange Rate Volatility and Central Bank Intervention," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 9(1), pages 69-84, June.
    • Handle: RePEc:sae:soueco:v:9:y:2008:i:1:p:69-84
    DOI: 10.1177/139156140700900103
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Takeshi Inoue, 2015. "Central Bank Intervention And Exchange Rate Behavior: Empirical Evidence For India," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(02), pages 1-11.
    2. Sok Heng Lay & Makoto Kakinaka & Koji Kotani, 2010. "Exchange Rate Movements in a Dollarized Economy: The Case of Cambodia," Working Papers EMS_2010_18, Research Institute, International University of Japan.
    3. Lukas Menkhoff, 2013. "Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies," The World Economy, Wiley Blackwell, vol. 36(9), pages 1187-1208, September.
    4. Wenbo Wang & Dieu Thanh Le & Hail Park, 2020. "Is Foreign Exchange Intervention a Panacea in Diversified Circumstances? The Perspectives of Asymmetric Effects," Sustainability, MDPI, vol. 12(7), pages 1-20, April.
    5. 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.
    6. 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.
    7. Pami Dua & Ritu Suri, 2019. "Interlinkages Between USD–INR, EUR–INR, GBP–INR and JPY–INR Exchange Rate Markets and the Impact of RBI Intervention," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1_suppl), pages 102-136, April.
    8. Abdul Rishad & Sanjeev Gupta & Akhil Sharma, 2021. "Official Intervention and Exchange Rate Determination: Evidence from India," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 13(3), pages 357-379, September.
    9. Ghosh, Sunandan & Kundu, Srikanta, 2019. "Central Bank Intervention in Foreign Exchange Market under Managed Float: A Three Regime Threshold VAR Analysis of Indian Rupee-US Dollar Exchange Rate," MPRA Paper 93466, University Library of Munich, Germany.
    10. Seojin Lee & Young Min Kim, 2020. "Effect of foreign exchange intervention: The case of Korea," Pacific Economic Review, Wiley Blackwell, vol. 25(5), pages 641-659, December.
    11. Ai-Chi Hsu & Fiesty Utami, 2016. "Central Bank Intervention and Stock Market Response," International Journal of Business and Administrative Studies, Professor Dr. Bahaudin G. Mujtaba, vol. 2(5), pages 151-161.
    12. Smita Roy Trivedi & Bobby Srinivasan, 2016. "Impact of Central Bank Intervention in the Foreign Exchange Market: Evidence from India Using an Event Study Approach," Economic Papers, The Economic Society of Australia, vol. 35(4), pages 389-402, December.

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    More about this item

    Keywords

    JEL: F31; JEL: C22; JEL: G21; Exchange Rate; GARCH; Central Bank Intervention;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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