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Do central bank actions curb exchange rate volatility?

Author

Listed:
  • Abdul Rishad
  • Sanjeev Gupta

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.

Suggested Citation

  • Abdul Rishad & Sanjeev Gupta, 2023. "Do central bank actions curb exchange rate volatility?," International Journal of Business and Globalisation, Inderscience Enterprises Ltd, vol. 35(1/2), pages 48-68.
    • Handle: RePEc:ids:ijbglo:v:35:y:2023:i:1/2:p:48-68
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