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

Ghosh, Sunandan and 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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Central bank intervention, Foreign exchange market, Managed float, Threshold VAR
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

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