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

Smita Roy Trivedi and P. G. Apte
Additional contact information
P. G. Apte: Narsee Monji Institute of Management Studies

Asia-Pacific Financial Markets, 2016, vol. 23, issue 3, No 2, 263-279

Abstract: 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.

Keywords: Central bank intervention; Exchange rate volatility; Foreign exchange markets; GARCH analysis; Intervention reaction function (search for similar items in EconPapers)
JEL-codes: C01 E58 F31 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10690-016-9218-6 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:apfinm:v:23:y:2016:i:3:d:10.1007_s10690-016-9218-6

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10690/PS2

DOI: 10.1007/s10690-016-9218-6

Access Statistics for this article

Asia-Pacific Financial Markets is currently edited by Jiro Akahori

More articles in Asia-Pacific Financial Markets from Springer, Japanese Association of Financial Economics and Engineering
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().