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Central Bank Intervention And Exchange Rate Behavior: Empirical Evidence For India

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  • TAKESHI INOUE

    (Faculty of Policy Studies, Nanzan University, 27 Seirei-Cho, Seto, Aichi 489-0863, Japan)

Abstract

This paper examines the causal relationship between central bank intervention and exchange rate returns in India. Using monthly data from December 1997 to December 2011, the empirical results derived from the CCF approach of Cheung and Ng [Journal of Econometrics72(1996) 33–48] suggest that there is causality-in-variance from exchange rate returns to central bank intervention, but notvice versa. These findings are robust in the sense that they hold in cases where the returns were measured from either the spot rate or the forward rate. Therefore, we conclude that the Indian central bank has intervened in the foreign exchange market to respond to exchange rate volatility, although the volatility has not been influenced by central bank intervention in the form of net purchases of foreign currency in the market.

Suggested Citation

  • Takeshi Inoue, 2015. "Central Bank Intervention And Exchange Rate Behavior: Empirical Evidence For India," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(02), pages 1-11.
    • Handle: RePEc:wsi:serxxx:v:60:y:2015:i:02:n:s0217590815500162
    DOI: 10.1142/S0217590815500162
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    References listed on IDEAS

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    1. Goyal, Ashima & Arora, Sanchit, 2012. "The Indian exchange rate and Central Bank action: An EGARCH analysis," Journal of Asian Economics, Elsevier, vol. 23(1), pages 60-72.
    2. Cheung, Yin-Wong & Ng, Lilian K., 1996. "A causality-in-variance test and its application to financial market prices," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 33-48.
    3. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-1369, December.
    4. Mohammad Afzal, 2010. "Exchange Rate and Reserves in Asian Countries: Causality Test," Global Economic Review, Taylor & Francis Journals, vol. 39(2), pages 215-223.
    5. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 183-224, July.
    6. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
    7. Harendra Behera & Vathsala Narasimhan & K.N. Murty, 2008. "Relationship between Exchange Rate Volatility and Central Bank Intervention," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 9(1), pages 69-84, June.
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    Cited by:

    1. Ghosh, Sunandan & Kundu, Srikanta, 2019. "Central Bank Intervention in Foreign Exchange Market under Managed Float: A Three Regime Threshold VAR Analysis of Indian Rupee-US Dollar Exchange Rate," MPRA Paper 93466, University Library of Munich, Germany.

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    More about this item

    Keywords

    Causality-in-variance; central bank; exchange rate; India; intervention; E58; F31;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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