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Central Bank Intervention in Foreign Exchange Market under Managed Float: A Three Regime Threshold VAR Analysis of Indian Rupee-US Dollar Exchange Rate

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  • Ghosh, Sunandan
  • Kundu, Srikanta

Abstract

We try to comprehensively analyze the nuances of Central Bank’s intervention in the foreign exchange market under a managed float exchange rate regime. We employ a three regime threshold VAR model and identify two endogenously determined threshold values of exchange rate cycle beyond which the Reserve Bank of India (RBI) intervenes in the Indian Rupee–US Dollar (Re/$) exchange rate market. We find that, as FIIs flow in, RBI’s interventions, mainly through open market operations, are successful in bringing the Re/$ exchange rate within the desired band. Within the band, the RBI tries only to mitigate domestic inflationary conditions.

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:93466
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    References listed on IDEAS

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    More about this item

    Keywords

    Central bank intervention; Foreign exchange market; Managed float; Threshold VAR;
    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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