Is the RBI's Exchange Rate Intervention Effective?

Abstract

This paper explores the effectiveness of foreign exchange intervention policy of Reserve Bank of India's during the market based exchange rate system over period 1993-2006. Existing empirical evidence on the effectiveness of intervention in Indian context is mixed: studies using data from the January 1996 suggest that Central Banks intervention operations reduces volatility in the market but some other empirical studies indicate that RBI's intervention is not effective in influencing the exchange rate. In this Paper, the stylized observations on the intervention indicate towards preference asymmetry in intervention. The OLS and TSLS estimates of reaction function confirm that RBI's intervention policy is effective and can be characterize by an asymmetric policy reaction. This asymmetry in intervention implies that RBI's response is more forceful to appreciating rupee than depreciating rupee. Such asymmetry in intervention attribute to the fear of export loss due to the appreciation of rupee.