Central Bank Interventions and Foreign Exchange Rate Volatility in India: Before and After the 2008 Global Financial Crisis
Central Bank Interventions and Foreign Exchange Rate Volatility in India: Before and After the 2008 Global Financial Crisis

Summary/Abstract: The study empirically investigates the dynamic inter- relationship between central bank interventions and volatility of the Indian rupee – US dollar exchange rate during before and after the 2008 global financial crisis. It also examines the factors influencing the volatility of exchange rate by employing GJR GARCH framework. For analysis, the study has divided data into two periods: pre- crisis (from April 01, 2002 to January, 30 2008) and post- crisis (from February 01, 2008 to March 30, 2012). The following data was used by the study: monthly data on Indian rupee - US dollar bilateral exchange rate, net FII inflows, net dollar purchases and sales of RBI and inflation differentials between USA and India. The empirical results show that RBI interventions are effective in reducing the volatility of the Indian rupee – US dollar exchange rate during the pre crisis period. However, RBI interventions seem to increases exchange rate volatility during post crisis. Finally the results suggest that higher FII inflows caused the Indian rupee to appreciate vis- a- vis the US dollar but this appreciation was accompanied by an increased volatility in the exchange rate.

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