RBI intervention in foreign exchange market
Exchange Rate Management in India : An Empirical Evaluation
Michael Debabrata Patra & Sitikantha Pattanaik*
Drawing from a strand in the literature, this paper develops objective indicators i.e., indices of exchange market pressure, intervention activity and monetary conditions in order to assess the efficacy, in terms of both timing and magnitude, of policy measures in assuaging exchange market pressures. The theoretical underpinning for the indices are drawn from a simple monetary model of exchange rate determination. This indices are found to perform well in tracking exchange market activity and policy action has been successful in relieving exchange market pressure.
Simplicity in the computation of these indices and their superiority in terms of quick availability, in encompassing overall developments in the balance of payments and in reflecting market activity recommends their use for operational purposes.
Since March, 1993 i.e., with the institution of the market based exchange rate system the conduct of exchange rate policy in India has attracted close scrutiny and evaluation. In the period from October 1993 to August 1998, the policy stance of ensuring orderly market conditions and allowing the exchange rate to reflect the macro economic fundamentals has been subjected to alternating phases of exchange market pressure, requiring the Reserve Bank of India (RBI) to 'lean against the wind ' against speculative attacks and also to 'lean with the wind ' in order to ensure soft landings of the exchange rate in the face of the perceived need for correcting overvaluation. The timing and magnitude of the RBI 's intervention in the exchange market has been assessed in various forms, ranging from technical charting to mechanistic interpretations of the drift in the real effective exchange rate (REER). A rigorous empirical evaluation of exchange rate management, drawing from theoretical underpinnings has, in general, been lacking.
With the
Michael Debabrata Patra & Sitikantha Pattanaik*
Drawing from a strand in the literature, this paper develops objective indicators i.e., indices of exchange market pressure, intervention activity and monetary conditions in order to assess the efficacy, in terms of both timing and magnitude, of policy measures in assuaging exchange market pressures. The theoretical underpinning for the indices are drawn from a simple monetary model of exchange rate determination. This indices are found to perform well in tracking exchange market activity and policy action has been successful in relieving exchange market pressure.
Simplicity in the computation of these indices and their superiority in terms of quick availability, in encompassing overall developments in the balance of payments and in reflecting market activity recommends their use for operational purposes.
Since March, 1993 i.e., with the institution of the market based exchange rate system the conduct of exchange rate policy in India has attracted close scrutiny and evaluation. In the period from October 1993 to August 1998, the policy stance of ensuring orderly market conditions and allowing the exchange rate to reflect the macro economic fundamentals has been subjected to alternating phases of exchange market pressure, requiring the Reserve Bank of India (RBI) to 'lean against the wind ' against speculative attacks and also to 'lean with the wind ' in order to ensure soft landings of the exchange rate in the face of the perceived need for correcting overvaluation. The timing and magnitude of the RBI 's intervention in the exchange market has been assessed in various forms, ranging from technical charting to mechanistic interpretations of the drift in the real effective exchange rate (REER). A rigorous empirical evaluation of exchange rate management, drawing from theoretical underpinnings has, in general, been lacking.
With the
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