Asymmetry in forex market intervention: Does it reflect fear of reserve inadequacy?

The stylised facts indicate that the Reserve Bank of India (RBI) added significant amount of reserves to its kitty although there was a persistent pressure on rupee to depreciate in the aftermath of global financial meltdown that surfaced in the year 2008. We probe this issue by estimating an intervention policy reaction function, based on the theoretical framework of Surico (2003) and Srinivasan et al. (2009), that captures the preference asymmetry in official intervention. The time varying estimates of the intervention function suggest that the official response to rupee appreciation is significantly larger than to rupee depreciation of the same magnitude, especially during the post financial crises period. Such preference asymmetry in intervention seems to have been driven by the urge to maintain the level of reserve at an optimal level dictated by certain reserve adequacy metrics. Therefore, the asymmetry in official intervention, especially when the quantum of reserve holding is less than or closure to certain minimum critical level, essentially reflects the ‘fear of reserve inadequacy’ rather than the ‘fear of currency appreciation’ as it is claimed by earlier studies.