The effectiveness of foreign exchange intervention in India : Evidence from time-series approach

Abstract

Central bank has a vital responsibility in stabling the exchange rate and dampening the market uncertainties for sustainable economic growth. This study inspects the aspect of RBI’s foreign exchange market intervention operation and its impact on the exchange rate level and volatility through time series methodology. GARCH (1,1) model with weekly data from April 2002 to June 2018 is used to explore the issue. The study discovered evidence for ‘leaning against the wind’ policy and provide evidence for curbing the market uncertainty. Similarly, it asserts that RBI’s action to inject foreign currency influenced the exchange rate but accelerated market uncertainty. Contrary to that RBI’s action to absorb excess supply by intervention curbed market uncertainty but failed to prevent appreciation pressure. Significance of good news points out its ability to appreciate rupee and curb the market uncertainty. The results strongly support the necessity of intervention and capital control for ensuring the sustainable growth of the foreign exchange market without uncertainty.

Keywords:

• Central bank operations
• Exchange rate
• Volatility
• GARCH
• RBI
• India