Title: Do central bank actions curb exchange rate volatility?

Authors: Abdul Rishad; Sanjeev Gupta

Addresses: School of Commerce and Management Studies, Central University of Himachal Pradesh, Dharamshala, India ' Department of HP, School of Commerce and Management Studies, Central University of Himachal Pradesh, India

Abstract: Floating exchange rate regime experience in India has always been about central bank's regular interventions through purchase and sale of foreign exchange assets. However, in recent years, this intervention has intensified because of lumpy capital inflow, seemingly signalling a bias in the direction of defending appreciation pressure. This study measures the effectiveness of intervention and its episodic change and its consistency by dividing the data into three sub-sample episodes. For this, it uses a GARCH (1, 1) model with weekly data on exchange rate, intervention and interest rate from April 1995 to December 2018. The results suggest significant influence of purchase intervention on exchange rate level as compared to that of sale intervention. Similarly, liquidity injection operations increased volatility, while liquidity absorption activities decreased it. Overall, the study presents empirical evidence for 'leaning against the wind' and 'fear of appreciation' policy in RBI's intervention operation.

Keywords: exchange rate; central bank intervention; foreign exchange market; Reserve Bank of India; RBI; rupee volatility; fear of appreciation; leaning against the wind.

DOI: 10.1504/IJBG.2023.134386

International Journal of Business and Globalisation, 2023 Vol.35 No.1/2, pp.48 - 68

Received: 05 Jul 2019
Accepted: 15 Jan 2020
Published online: 20 Oct 2023 *

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