Does Exchange Rate Intervention Trigger Volatility?

This study aims at investigating two important issues concerning the exchange rate intervention policy of the Reserve Bank of India: (1) whether there is any asymmetry in intervention; and (2) whether intervention triggers volatility. The empirical evidence derived from a class of GARCH and A-PARCH models indicate the latter one fits the data much better than the conventional GARCH models. Further, intervention seems to have increased exchange rate volatility; the official sale of foreign exchange have had a relatively larger impact on exchange volatility than official purchase. This is consistent with the argument that secret intervention creates ambiguity in the market; hence, it results in larger volatility of exchange rate.