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Central Bank Intervention in Foreign Exchange Market under Managed Float: A Three Regime Threshold VAR Analysis of Indian Rupee-US Dollar Exchange Rate

Sunandan Ghosh and Srikanta Kundu

MPRA Paper from University Library of Munich, Germany

Abstract: We try to comprehensively analyze the nuances of Central Bank’s intervention in the foreign exchange market under a managed float exchange rate regime. We employ a three regime threshold VAR model and identify two endogenously determined threshold values of exchange rate cycle beyond which the Reserve Bank of India (RBI) intervenes in the Indian Rupee–US Dollar (Re/$) exchange rate market. We find that, as FIIs flow in, RBI’s interventions, mainly through open market operations, are successful in bringing the Re/$ exchange rate within the desired band. Within the band, the RBI tries only to mitigate domestic inflationary conditions.

Keywords: Central bank intervention; Foreign exchange market; Managed float; Threshold VAR (search for similar items in EconPapers)
JEL-codes: E58 F31 (search for similar items in EconPapers)
Date: 2019-04-23
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
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