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Central bank intervention and exchange rate behaviour : empirical evidence for India

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  • Inoue, Takeshi

Abstract

This paper examines the causal relationship between central bank intervention and exchange returns in India. Using monthly data from December 1997 to December 2011, the empirical results derived from the CCF approach of Cheung and Ng (1996) suggest that there is causality-in-variance from exchange rate returns to central bank intervention, but not vice 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, the results of this paper suggest 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.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/1178/1/ARRIDE_Discussion_No.353_inoue.pdf
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Bibliographic Info

Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 353.

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Date of creation: Jun 2012
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Publication status: Published in IDE Discussion Paper. No. 353. 2012.6
Handle: RePEc:jet:dpaper:dpaper353

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Related research

Keywords: India; Foreign exchange; Exchange control; Central bank; Causality-in-variance; Exchange rate; Intervention;

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  1. 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.
  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. Ashima Goyal & Sanchit Arora, 2010. "The Indian exchange rate and central bank action: A GARCH analysis," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2010-009, Indira Gandhi Institute of Development Research, Mumbai, India.
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