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

Asia-Pacific Financial Markets, September 2016, Volume 23, Issue 3, pp 263–279.

Posted: 7 Sep 2016

See all articles by Smita Roy Trivedi

Smita Roy Trivedi

National Institute of Bank Management; NIBM

Prakash Apte

Indian Institute of Management, Bangalore

Date Written: September 6, 2016

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.

Suggested Citation

Roy Trivedi, Smita and Roy Trivedi, Smita and Apte, Prakash, Central Bank Intervention in USD/INR Market: Estimating Its Reaction Function and Impact on Volatility (September 6, 2016). Asia-Pacific Financial Markets, September 2016, Volume 23, Issue 3, pp 263–279. , Available at SSRN: https://ssrn.com/abstract=2835334

Smita Roy Trivedi (Contact Author)

National Institute of Bank Management ( email )

NIBM Pune
Pune, 411048
India

NIBM ( email )

Kondhwe Khurd, NIBM P.O.
Pune, WY Maharashtra 411048
India

Prakash Apte

Indian Institute of Management, Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka
India

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