Zone-quadratic preference, asymmetry and international reserve accretion in India: An empirical investigation

Naveen Srinivasan and Sudhanshu Kumar ()

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 2, 253-263

Abstract: Empirical estimates of the Reserve Bank of India's (RBI) intervention reaction function suggest that the central bank actively intervenes in the foreign exchange market to contain volatility but this intervention is neither continuous nor linear. It is better described by a nonlinear policy reaction function with a target range as opposed to a point target. It responds much more vigorously to appreciating or depreciating pressure outside the target range but the response is much more muted within the range. Moreover, the tolerance band is asymmetric i.e., the RBI responds much more strongly to appreciating pressure than depreciating pressure. Such a policy response in an era of continuous net capital inflows accounts for the large build-up in foreign exchange reserves witnessed in India in the recent past.

Keywords: International Reserves; Monetary policy; Exchange rate; Target range; Asymmetry (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 F33 F41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:2:p:253-263

DOI: 10.1016/j.intfin.2011.09.005

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