Skip to main content
SpringerLink
Log in

Volatility spillover between the RBI’s intervention and exchange rate

  • Original Paper
  • Published:
International Economics and Economic Policy Aims and scope Submit manuscript

Abstract

This study examines the effectiveness of the Reserve Bank of India’s (RBI) intervention policy in the foreign exchange market. An attempt is made to capture volatility spillovers between the RBI’s intervention and exchange rate. The results indicate that the past volatility of intervention has a positive impact on the present volatility of the exchange rate. Similarly the past volatility of the exchange rate, increases the present volatility of intervention. The volatility of the exchange rate is more sensitive to its past shock than the past shock of an intervention. Similarly, the volatility of intervention is more sensitive to the past volatility of exchange rate compared to the past volatility of intervention.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. Since, the data on buying and selling operation at less than monthly frequency is not available; we had to construct buying and selling operation by multiplying dummies (D1 for buying D2 for selling operation) with the percentage change in the foreign currency asset, when the changes are positive and negative respectively. RBI intervenes in the foreign exchange market by buying foreign exchange (US $), which in turn increases the stock of foreign currency asset and vice versa.

  2. Ideally, we should employ the capital inflow and outflow as good news and bad news respectively. Instead, negative and positive changes in the 91 days US Treasury bill rate is chosen as proxy for good news and bad news respectively. Since the data on capital inflow and outflow is not available for the sample period. However, the proxy could efficiently capture the impact of good news and bad news on exchange rate.

References

  • Almekinders GJ (1995) Foreign exchange intervention: theory and evidence. Edward Elgar, Cheltenham

    Google Scholar 

  • Baig MA, Narasimhan V, Ramachandran M (2003) Exchange market pressure and the Reserve Bank of India’s intervention activity. J Policy Model 25:727–748

    Article  Google Scholar 

  • Baillie RT, Humpage OF (1992) Post-Louvre intervention: did targets stabilize the dollar?. Federal Reserve Bank of Cleveland Working Paper 9203

  • Benigno G, Benigno P (2008) Exchange rate determination under interest rate rules. J Int Money Financ 27:971–993

    Article  Google Scholar 

  • Bollerslev T (1986) Generalized autoregressive conditional heteroscedasticity. J Econ 31:307–327

    Article  Google Scholar 

  • Bollerslev T, Engle RF, Wooldridge JM (1988) A capital asset pricing model with time-varying covariances. J Polit Econ 96:116–131

    Article  Google Scholar 

  • Brooks C, Burke PS, Persand G (2003) Multivariate Garch models: software choice and estimation issues. J Appl Econ 18:725–734

    Article  Google Scholar 

  • Conrad C, Lamla JL (2010) The high-frequency response of the EUR-USD exchange rate to ECB communication. J Money Credit Bank 42:1391–1417

    Article  Google Scholar 

  • Diebold F, Nerlove M (1989) The dynamics of exchange rate volatility: a multivariate latent factor ARCH model. J Appl Econ 4:1–21

    Article  Google Scholar 

  • Dominguez KM (1993) Does central bank intervention increase the volatility of foreign exchange rates?. NBER Working Paper No. 4532

  • Dominguez KM (1998) Central Bank intervention and exchange rate volatility. J Int Money Financ 17:161–190

    Article  Google Scholar 

  • Dominguez KM, Frankel J (1993) Does foreign-exchange intervention matter? The portfolio effect. Am Econ Rev 83:1356–1369

    Google Scholar 

  • Dominguez KM, Panthaki F (2006) What defines ‘news’ in foreign exchange markets? J Int Money Financ 25:168–198

    Article  Google Scholar 

  • Engle R (1982) Autoregressive conditional heteroskedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50:987–1007

    Article  Google Scholar 

  • Engle RF, Kroner KF (1995) Multivariate simultaneous generalized arch. J Econ Theory 11:122–150

    Article  Google Scholar 

  • Fischer AM, Zurlinden M (1999) Exchange rate effects of Central Bank interventions: an analysis of transaction prices. Econ J 109:662–676

    Article  Google Scholar 

  • Hsieh DA (1989) Modeling heteroscedasticity in daily foreign exchange rates. J Bus Econ Stat 73:307–317

    Google Scholar 

  • Karanasos M, Kim J (2005) The inflation-output variability relationship in the G3: a bivariate GARCH (BEKK) approach. Risk Lett 1:17–22

    Google Scholar 

  • Kearney C, Patton JA (2000) Multivariate GARCH modeling of exchange rate volatility transmission in the European monetary system. Financ Rev 41:29–48

    Article  Google Scholar 

  • Klein MW, Rosengren ES (1991) Foreign exchange intervention as a signal of monetary policy. Fed Reserv Bank Boston N Engl Econ Rev 39–49

  • Knot K, Haan J (1993) Interest rate differentials and exchange rate policies in Austria, The Netherlands, and Belgium. J Bank Financ 19:363–386

    Article  Google Scholar 

  • Lindberg H (1994) The effects of sterilized interventions through the signalling channel: Sweden1986–1990. Sveriges Riksbank Arbetsrapport No. 19

  • Ljung MJ, Box GE (1979) The likelihood function of stationary autoregressive-moving average models. Biometrika 66:265–270

    Article  Google Scholar 

  • Marilyn KW (1999) A Bivariate GARCH Approach to the Futures Volume—Volatility Issue. Eastern Finance Association Meetings: 1–30

  • Neely CJ (2005) An analysis of recent studies of the effect of foreign exchange intervention. Fed Reserv Bank St Louis Rev 87:685–717

    Google Scholar 

  • Obstfeld M (1983) Exchange rates, inflation and the sterilisation problem: Germany 1975–1981. Eur Econ Rev 21:161–189

    Article  Google Scholar 

  • Osterberg WP, Wetmore R (1995) More on the differences between reported and actual U.S. central bank interventions. Federal Reserve Bank of Cleveland, Working Paper 9501

  • Ramachandran M (2006) On the upsurge of foreign exchange reserves in India. J Policy Model 28:797–809

    Article  Google Scholar 

  • Ramachandran M, Srinivasan N (2007) Asymmetric exchange rate intervention and international reserve accumulation in India. Econ Lett 94:259–265

    Article  Google Scholar 

  • RBI Report on Currency and Finance, 1999–2000

  • Saacke P (2002) Technical analysis and the effectiveness of central bank intervention. J Int Money Financ 21:459–479

    Article  Google Scholar 

  • Vadivel A (2009) Exchange rate intervention and volatility of exchange rate in India. Indian Econ J 54:143–152

    Google Scholar 

  • Wong SK, Chau KW, Yiu CY (2007) Volatility transmission in the real estate spot and forward markets. J Real Estate Financ Econ 281–293

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Pondicherry University, Punducherry, 605 014, India

    Linkon Mondal

Authors
  1. Linkon Mondal
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Linkon Mondal.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Mondal, L. Volatility spillover between the RBI’s intervention and exchange rate. Int Econ Econ Policy 11, 549–560 (2014). https://doi.org/10.1007/s10368-013-0257-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-013-0257-4

Keywords

Search

Navigation