Central Bank Intervention in Foreign Exchange Market under Managed Float: A Three Regime Threshold VAR Analysis of Indian Rupee-US Dollar Exchange Rate
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/)exchangeratemarket.Wefindthat,asFIIsflowin,RBI’sinterventions,mainlythroughopenmarketoperations,aresuccessfulinbringingtheRe/ exchange rate within the desired band. Within the band, the RBI tries only to mitigate domestic inflationary conditions