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Reserve bank of India occasionally intervenes in the foreign exchange market to curtail the exchange rate volatility. The nature of intervention by the RBI in the spot and forward segment of the forex market has always been with a purpose (either implicit or explicit) and sometimes on a continuous basis for several days. This paper empirically examines the profitability and stabilizing effect of the intervention operations of the Reserve bank of India. Murray approach (1990) and GARCH model has been adopted to study the same. It also presents evidence on the extent to which intervention operations are sterilized. The main conclusion is that the central bank has incurred substantial losses on account of negative Net Interest Income and sterilization is almost complete.

JEL Classification: C2, E5, F3

Keywords: Intervention, Sterilization, GARCH, Exchange rate volatility

INTRODUCTION

The failure of the gold standard and the subsequent introduction of the Bretton Woods exchange rate system post World War II marks the evolution of central bank intervention in the foreign exchange market in a formal sense. The response of the economics profession towards central bank intervention appears to have shifted several times in the second half of the twentieth century. At the time of collapse of the Bretton Woods system in the early 1970s, the profession appeared strongly to favor a pure float, involving zero intervention. The 1970s experience with the floating exchange rate system among the developed countries, and the ensuing volatility of their exchange rates gradually led to a shift in this consensus so that, by the late 1970s, both economists and policy makers frequently criticized the US authorities for not intervening enough in support of the dollar.

In the early 1980s, with the substantial increase in capital flows among the developed economies, the economists came to believe that in face of these massive capital movements; intervention can be effective only over a very short run. This view was further acknowledged in the Jurgensen Report on the intervention operations of the US Federal Reserve which was commissioned by the 1982 G7 Economic Summit of Heads of Government at Versailles. This report did not provide very explicit conclusions. The official press release of the finance ministers and central bank governors of the G7, however, stated that the main results of their report could be summarized as follows:

* Sterilized intervention affects long run exchange rates much less than non-sterilized intervention

* Sterilized intervention can influence exchange rates only in the short run

* Coordinated intervention can be much more effective relative to intervention by the central bank of a single country.

The introduction of the direct quotation system in 1993 and the termination of RBI announcing it’s buying and selling rates in 1995 were important miles stones in moving towards a market determined exchange rate. The dilemma posed to the policy makers was to manage volatility without deviating from the path of market driven system. RBI’s response to volatile exchange rate movements has been a combination of monetary policy and administrative measures together with intervention. A significant change in approach was made in 1998 following the sharp volatility experienced in international markets. The provisions, which allowed incentives for speculation to end-users and intermediaries, were identified and withdrawn. The focus of operation shifted directly from intervening in the market to identifying those demands that could rectify the imbalance viz. oils payments and bunched demands were smoothened by RBI. The RBI does not target any exchange rate or resist fundamentals. Thus leads and lags have become the major focus of exchange rate management. The RBI’s operations have all along aimed at evening out the imbalances and smoothening the process of two-way changes. The market has developed greater strength, has become much deeper and liquid, credibility of the currency has enhanced in the eyes of the global players and greater confidence in the system among investors. The entire spectrum of relaxations, which were temporarily withdrawn, have been more or less restored. In India, intervention operations by the Reserve bank of India in the foreign exchange market are not essentially a phenomenon of the early 1990s, i.e. post economic liberalization of 1992. However, intervention operations did increase substantially since the introduction of the Unified Exchange Rate System in March 1993 which made the Indian Rupee convertible on the Current Account.

Since intervention operations involve buying and selling of foreign currency vis-avis domestic currency, it has direct implications for the foreign exchange reserves held by the monetary authority of the country. The policy of reserves accumulation comes with an opportunity cost in the form of the interest income foregone on the domestic currency assets and trading losses (if any). This cost assumes critical importance, especially in the case of developing countries such as India which is subject to significant resource constraints. Besides the profitability of intervention operations, the other dimension which comes up a great deal in the current discussion is the ability of central banks to monitor or influence their respective exchange rates. A central bank need not intervene in the foreign exchange market in case its ability to lean against the wind and to curtail the exchange rate volatility is insignificant. In this context, it becomes essential to assess the profitability, stabilizing effects and extent of sterilization of intervention operations.

Studies of foreign exchange intervention generally distinguish between intervention that does or does not change the monetary base. The former type is called unsterilized intervention while the latter is referred to as sterilized intervention. When a monetary authority buys (sells) foreign exchange, its own monetary base increases (decreases) by the amount of the purchase (sale). By itself, this type of transaction would influence exchange rates in the same way as domestic open market purchases (sales) of domestic securities; however, many central banks routinely sterilize foreign exchange operations; that is, they reverse the effect of the foreign exchange operation on the domestic monetary base by buying and selling domestic bonds (Edison, 1993). Conceptually distinct, but operationally overlapping steps in the sterilization process are: (a) decision of the monetary authority to intervene by substituting foreign currency with domestic currency in case of excess capital inflows, and (b) decision to intervene further in the bond or money market to substitute domestic currency so released out of the intervention in forex market with bonds or other eligible paper. While open market operations (OMO) involving sale of securities constitute the commonly used instrument of sterilization, there are several other instruments available to offset the impact of capital inflows on domestic money supply. However, there are occasions when it is difficult to distinguish the normal liquidity management operations of a central bank from its sterilization operations. Unsterilized intervention directly affects the domestic money supply, whereas, sterilized intervention keeps the money supply more or less unchanged. Hence, unsterilized intervention is supposed to be more effective in influencing the exchange rates. Central banks aim at sterilizing their intervention operations because unsterilized interventions go against the monetary policy objectives pursued by the central banks To the extent that central banks want to undertake a change in monetary policy to influence the exchange rate they would do this through their usual means, which in most cases is operations in the domestic money market, rather than waiting for it to happen as a by-product of foreign exchange intervention. One reason for this is that intervention only impacts the domestic monetary reserves with a lag, as foreign exchange transactions are settled two days after being undertaken. A central bank whose currency was under threat to such a degree that it would consider raising interest rates would not want to wait for two days to achieve this monetary tightening through its failure to sterilize its intervention (Broadbent, 1994). Many central banks officially espouse the policy of sterilizing their intervention (Neely, 2000), but in practice some find it difficult to fully offset the effects of the resulting changes in net foreign assets. Thus, many interventions by central banks around the world remain at least partly nonsterilized.

Spot market is for transactions which are to be settled in two days (T+2). In the Forward market, transactions are settled after one or more months. Forward market interventions—the purchase or sale of foreign exchange for delivery at a future date-have the advantage that they do not require immediate cash outlay. If a central bank expects that the need for intervention will be short-lived and will be reversed, then a forward market intervention may be conducted discreetly—with no effect on foreign exchange reserves data. For example, RBI discloses its intervention via the forward market channel in RBI Bulletin only on a monthly basis. Hence, the data regarding any forward market intervention is available after a time lag. Not all spot or forward market transactions are intervention, of course. Both the spot and forward markets may be used simultaneously. A transaction in which a currency is bought in the spot market and simultaneously sold in the forward market is known as a Swap Deal. While a swap itself will have little effect on the exchange rate, they can be used as part of an intervention. The Reserve Bank of India conducts swap deals to sterilize spot interventions. Central banks prefer the spot/swap combination rather than an outright forward because the former permits more flexible implementation of the intervention. If the rupee is under pressure, RBI conducts a Sell/Buy Swap. Spot sales increase the supply of dollars and thus eliminate the excess demand for dollars. Similarly, by buying dollars forward, RBI preempts the possibility of the depletion of the foreign exchange reserves. If the call rates and the forward premia are high, RBI engages in buy-sell swaps. Under a buy-sell swap, RBI buys dollars from a commercial bank, augments its rupee resources and then sells it back at a future date at a pre-negotiated price. The purchase of spot dollars gets reflected in the net spot purchases total of a particular month (the RBI does not give the break-up for spot, outright forward and swap separately) as well as the total purchases. The forward sales boost the outstanding forward sale figure and the total sale of dollars. This buy-sell swap has the advantage that it serves the twin objectives of cooling the call rates and forward premia at the same time.

Central banks generally intervene in the spot and forward market through swap deals. However, they could also resort to the currency options market for the purpose of intervention. For instance, in July 1996, the Central Bank of Mexico announced that it would sell dollar put options. The notional amount underlying the options initially was US $130 million. By June 1997, this amount had increased to $300 million. Similarly, the Bank of Spain intervened in the options market in the 1992/93 ERM crisis.

Many papers have explored the issue of the profitability of intervention operations. Researchers have employed a wide variety of subtle ways for this purpose ranging from oversimplified rules of thumb to some extremely sophisticated mathematical models. On similar lines, advanced time-series techniques such as GARCH, EGARCH, Markov Regime-switching etc. have often been employed to assess the ‘volatility curtailing’ effect of the intervention operations. All things considered, it needs to be emphasized that current studies on central bank intervention have been conducted in the context of developed countries, the plausible reason being the availability of high-frequency data to researchers. In the case of developing countries, access to intervention data is seriously limited which consequently impairs research projects on intervention process. The difficulty is particularly pronounced in India’s case because RBI publishes intervention data at monthly frequency and that too, in an aggregated manner.

MODEL, DATA & METHODOLOGY

In this paper, the sample period runs from April 1995 to August 2004. It comprises of the monthly observations on the following variables;

* Rs/$ Exchange rate

* Sales and purchases of US $ by the RBI

* Reserve money

* Yield on the 91-Day Treasury Bill & 7 year G-sec issued by Govt. of India

* Yield on the US 3-month Treasury Bill & 7 year Treasury bond

US Dollar was officially pronounced as the intervention currency by the RBI in February 1993 (RBI notified the inclusion of the Euro as the additional intervention currency on 4th March, 2002). Monthly data on Rs/$ exchange rate, Reserve money, yield on 91 Day Treasury bill and intervention operations is published by the RBI in ‘Handbook of Statistics’ and the monthly RBI Bulletin. The data in respect of the yield on 3 month US Treasury Bill has been downloaded from the website of Federal Reserve Board.

Central banks of OECD countries publish intervention data on a daily basis (Neely, 2000). However, in India, official intervention data is published by RBI in the RBI Bulletin on a monthly basis. This significantly limits the size of the dataset; not more than 120 observations over a 10-year period. The data, moreover, suffers from aggregation problems’. This difficulty can be overcome by employing ‘Weekly change in the foreign currency assets held by RBI’ as a proxy for actual intervention by RBI on a weekly basis. However, using the ‘Weekly change in the foreign currency assets’ as a proxy for actual intervention is not without its own set of problems. Reserves need not ‘move in lock-step’ with intervention (Leahy, 1995), especially in the presence of official borrowing of foreign currencies from multilateral financial institutions such as IMF & World Bank ,currency swaps, forward market intervention, interest receipts on official portfolio holdings, hidden reserves and transactions between central banks. Another drawback is that intra-week swings in exchange rates and intervention operations can be missed. Thus, reserve changes are at best only a noisy indicator of official intervention operations. For example, RBI occasionally makes dollar purchases in the foreign exchange market in order to meet the massive import bill of public-sector oil majors such as IOC, HPCL & BPCL. This operation cannot be unequivocally classified as intervention dollar purchases. Similarly, ‘Resurgent India Bonds (1998)’ & ‘India Millennium Bonds (2000)’ added to the foreign exchange reserves of RBI, although they never entered the foreign exchange market. The redemption of these foreign currency bonds was made by RBI partly through the foreign exchange reserves and through forward market purchases; wherein the former transaction had no impact on the foreign exchange market.

Profitability of Intervention Operations

Murray, Zelmer and Williamson (1990), in their study of profitability for the Bank of Canada’s intervention in the foreign exchange market, adopted the following methodology;

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (1)

where;

[[pi].sub.t] is the total profit accruing from intervention operations at time t.

[V.sub.i] is the addition to an existing US dollar position, with [v.sub.i] positive for purchases of US dollars in a long position and [v.sub.i] negative for sales of US dollars in a short position;

[M.sub.i] is the reduction in an existing US dollar position, with [m.sub.i] positive for sales of US dollars in a long position and mi negative for purchases of US dollars in a short position;

[e.sub.i] is the exchange rate at which a transaction is executed in terms of Rs./$

[r.sub.i] and [r.sup.*.sub.i] are the short-term interest rates on Indian rupee and US dollar assets respectively; and

[s.sub.t] is the weighted average exchange rate at which the position is acquired and, for period t, it is calculated as:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

The three components on the right hand side of formula (1) can be interpreted as follows:

* First component calculates the realized trading profit during the period;

* Second component is a measure of the unrealized trading profit. It simply revalues any existing US dollar position using the exchange rate at the end of the period; and

* Third is a measure of net interest earnings from holding a long US dollar (short Indian rupee) position compared with holding the equivalent in Indian rupee.

There is a distinction made between a transaction that adds to an existing US dollar position, [v.sub.i], and a transaction that partially reverses a position, [m.sub.i]. If a transaction adds to an existing US dollar position, the average exchange rate at which that position was acquired is recalculated so as to include that new transaction. At that point, there is no effect on profits. It is only when the position is reversed that trading profit or losses are realized. Realized profits/losses are calculated by comparing the exchange rate at which these US dollars are bought/sold to close out a position with the average exchange rate at which the position was acquired. At the end of the period, the unrealized profit or loss on the remaining open position can be measured by comparing the cost of establishing that position and the prevailing exchange rate. A simple example best illustrates.

Suppose that RBI initially purchases foreign currency and builds up a long US dollar position. As it continues to buy US dollars, the average exchange rate at which its long position has been acquired is recalculated. (In this case, the average exchange rate is an average purchase price.) Profits or losses are realized only when the position is reversed by selling US dollars. If the exchange rate at which the US dollars are sold is higher than the average cost at which they were acquired, then there is a realized profit on this transaction. If selling of US dollars is sustained, it gradually reverses the long US dollar position, resulting in profits/losses being realized until the position is fully closed out. Once closed out, further sales of US dollars open a short US dollar position and the average exchange rate at which this position has been acquired is an average selling price. Profits/losses are realized on this short US dollar position only when US dollars are purchased. Finally, at the end of the period, unrealized profits on the outstanding US dollar position are calculated using the end-of-period exchange rate. Murray’s approach definitely outweighs the approach developed by Leahy (1995) because the former gives a complete breakup of the total profits into Trading profits, Revaluation profits & Net Interest income; whereas, Leahy’s approach doesn’t break up the total intervention profit in its various components.

In the estimations, the foreign currency position created by intervention operations prior to the period under consideration; i.e. period prior to April 1995 in the present research project has to be disregarded. Hence, the calculations begin on the implicit assumption that RBI had nil position as at end of March 1995. During April and May 1995, RBI did not intervene in the foreign exchange market. In the subsequent months, it purchased dollars & thus created a long dollar position. However, in October 1995, the position was more than reversed & opened up a short dollar position. Hence [V.sub.i] is negative in October 1995. Only in April 1996, RBI managed to square off this short position. Subsequently, a long dollar position has been maintained till the end of the sample period.

Estimation procedure

1. Estimate [V.sub.i] and [M.sub.i]

2. Estimate cumulative values of [V.sub.i]-[M.sub.i]

3. Calculate the product of [V.sub.i] & exchange rate

4. Estimate [S.sub.t] on basis of steps 1, 2 and 3

5. Calculate [e.sub.t]-[s.sub.t]

6. Estimate Realized profits on basis of steps 1 and 5

7. Estimate Unrealized profits on basis of steps 2 and 5

8. Calculate the annual interest rate differential and divide it by 12

9. Estimate Net interest income on basis of steps 2,5 and 8

10. Estimate total profits by summing steps 6, 7 and 9.

Estimation has been made on the basis of the following three possible combinations of the foreign currency portfolio of the RBI:

(I) 50% in 91 day T-Bills & 50% in 7 year government paper

(II) 70% in 91 day T-Bills & 30% in 7 year government paper

(III) 30% in 91day T-Bills & 70% in 7 year government paper

Profit/Loss estimates (April 1995-August 2004) (In rupees crores)

The estimations testify that RBI has booked substantial Realized profits for the month ended August, 2004. The possible explanation could be that in spite of the occasional dollar sales, RBI has managed to build up a long dollar position through its intervention dollar purchases. Moreover, the rupee has depreciated steadily against the dollar throughout the period under consideration. As against this, the weighted average exchange rate, St has depreciated relatively less than the actual exchange rate. For instance, during the month of June 2003, actual exchange rate was Rs.46.75/ $ as against the [S.sub.t] of Rs. 45.69/$. As a result, the long dollar position built up by RBI has appreciated in terms of rupees. This has significantly contributed to the unrealized profits. It has also made it possible for RBI to liquidate its long dollar position at a relatively higher actual exchange rate. From the dataset, it is evident that RBI has been steadily accumulating dollars through net dollar purchases. A plausible explanation for this observation is that foreign investments, direct as well as portfolio investments tend to exert upward pressure on the rupee. In order to maintain the competitiveness of Indian exports and protect the domestic industry from cheaper imports, RBI mops up the in-coming dollar flows. Through its intervention operations, RBI has built up significant foreign exchange reserves. Indian interest rates have exceeded the dollar interest rates throughout the period analyzed April, 1995-August, 2004. Consequently, the opportunity cost of dollar purchases, i.e. interest foregone on equivalent rupee amount, has always exceeded the income generated by holding interest-earning dollar assets. Consequently, if Net Interest Income is taken into consideration, the profit figures change drastically. And since RBI has maintained a long dollar position (i.e. a short rupee position) since April 1996, the opportunity cost of holding dollar assets has far exceeded the interest income generated by interest earning dollar assets.

It is difficult to make an assessment about intervention effectiveness from the estimated profit positions since any such evaluation must be made in the light of the intervention objectives of the central bank. In certain cases, despite the known opportunity costs of holding high reserves and the associated net loss, reserve accumulation policy may continue in the interest of other objectives to be achieved through a high reserve policy. In case the only objective been pursued is exchange rate stability irrespective of portfolio allocation between domestic and foreign currency assets, then intervention operations of the RBI need not be a losing proposition. However, from the point of view of commercial viability, the intervention operations do not pass the Profits test.

Sterilization of Intervention Operations

Reserve Bank of India publishes monthly data on Reserve Money and intervention in the foreign exchange. Considering the central bank intervention to be exogenous variable, a simple linear regression equation has been estimated with change in domestic credit as the dependent variable over three different time periods. Assuming a structural break on account of South East Asian currency crisis (August 1997-July 1998) and the returning of normalcy in the Indian foreign exchange market in August 1998, the total sample period has been further divided in two different time periods.

(a) April 1995-June 2003 (Total sample period)

(b) April 1995-July 1998 (Pre-Asian crisis period)

(c) August 1998-August 2004 (Post-Asian crisis period)

The following equation has been estimated;

[DELTA] [DC.sub.t] = [a.sub.0] + [a.sub.1] [Intv.sub.t] + [e.sub.t] (3)

where,

[DELTA] [DC.sub.t] = [DELTA] [RM.sub.1] — [Intv.sub.1] (4)

[DC.sub.t] = Domestic credit

Intv = Intervention amount (in Rs.)

RM = Reserve money

Information regarding degree of sterilization is provided by the value of a1. A priori, the parameter [a.sub.1] is expected to be negative. If it is not statistically significantly different from-1, sterilization is full, while if it is greater than—1 but less than zero, then sterilization is incomplete. In the empirical literature, sterilization has been rarely found to be ‘complete’ (in a statistical sense); moreover the degree of sterilization varies over time and samples, i.e. the results are not robust and the sterilization parameter is unstable.

The coefficient [a.sub.1] is negative and statistically significant over three different time periods. Moreover, its magnitude is stable and similar, i.e. approximately 0.96, throughout the estimation period. However, the fact that it is less than 1 signifies the incomplete sterilization of intervention operations.

Impact of Intervention on Exchange Rate Volatility

GARCH (1, 1) model has been estimated to analyze the impact of RBI’s intervention operations on the volatility of Rs./$ exchange rate. Existing literature has frequently employed implied volatility from foreign currency options as a measure of exchange rate volatility. However, the implied volatility measure could not be employed in the present estimations on account of the absence of data on exchange-traded foreign currency options in India. A hypothesis that can be tested using the GARCH model is that the variability of today’s exchange rate depends on past variability.

The GARCH (1, 1) models of the Rs/$ exchange rate estimated below have the following two specifications:

Type 1

[DELTA]ln[S.sub.t] = [a.sub.0] + [a.sub.1] [I.sub.t] + [e.sub.t] (5)

where;

[e.sub.t] = [v.sub.t] [square root of ([h.sub.t])]

[h.sub.t] = E([e.sub.t]).sup.2] = [b.sub.0] + [b.sub.1] [e.sup.2.sub.t-1] + [b.sub.2] [h.sub.t-1] + [c.sub.1] [absolute value of [absolute value of [I.sub.t]] (6)

[absolute value of [I.sub.t]]: Absolute value of intervention in month t

Type 2

[DELTA]ln[S.sub.t] = [a.sub.0] + [a.sub.1] [Buy.sub.t] + [a.sub.2] [Sell.sub.t] + [e.sub.t] (7)

where;

[e.sub.t] = [v.sub.t] [square root of ([h.sub.t])]

[h.sub.t] = E[([e.sub.t]).sup.2] = [b.sub.0] + [b.sub.1] [e.sup.2.sub.t-1] + [b.sub.2] [h.sub.t-1] + [c.sub.1] [Buy.sub.t] + [c.sub.2] [Sell.sub.t] (8)

[Buy.sub.t] = Dollars purchased by RBI in month t

[Sell.sub.t] = Dollars sold by RBI in month t

[DELTA]ln[S.sub.t] is the monthly change in the log values of Rs./$ exchange rate. In the mean equation, positive value for the intervention variable implies purchase of dollars, and negative value denotes dollar sales by RBI. In the conditional variance equation, intervention variables have been included in order to estimate their impact on exchange rate volatility. In these models, [a.sub.1] indicates the impact of current intervention operations on the log return of exchange rate. A priori, it should be positive indicating that increase in dollars purchased results in dollar appreciation/rupee depreciation. The coefficients [b.sub.1] and [b.sub.2] signify the ARCH and GARCH effects respectively; statistically significant [b.sub.1] testifies the phenomenon of Volatility Clustering. The coefficients [c.sub.1] and [c.sub.2] depict the impact of intervention operations on the exchange rate volatility. Negative values for these coefficients underline the effectiveness of these operations in curtailing exchange rate volatility.

In the mean equation, [a.sub.1] is incorrectly signed, i.e. rupee appreciates with increase in purchase of dollars & it is statistically significant. ARCH and GARCH coefficients are correctly signed with the sum less than 1. Moreover, they are statistically significant. In the variance equation, the coefficient of intervention variable is correctly signed (i.e. negative) and it is statistically significant.

In the mean equation, [a.sub.1] is again incorrectly signed & it is statistically significant. Although ARCH and GARCH coefficients are correctly signed with sum less than 1, they are statistically insignificant. In the variance equation, the coefficients of intervention variables for dollars bought and sold are correctly signed. However, they are statistically insignificant at 5% level. This implies that individual dollar purchases and sales by the RBI do not curtail exchange rate volatility.

POLICY IMPLICATIONS

Since the pronouncement of the US$ as the intervention currency in February 1993, RBI has rarely resorted to any other currency for the purpose of intervention. However, in light of the recent depreciation of the US$ vis-a-vis other currencies such as the Euro and Japanese Yen, the unrealized gains on the foreign exchange reserves accumulated through intervention have gradually declined. Hence, the RBI could very well diversify its choice of intervention currency. This could further enhance the traded volumes of other currencies. Secondly, the sterilization coefficient estimated in chapter 5 has been stable throughout the sample period at around 0.96. This result clearly underlines the fact that sterilization is incomplete, i.e. intervention operations do influence reserve money growth. The central bank has to ensure complete sterilization in order to maintain the stability of the growth of money supply, and consequently, price stability. Market Stabilization Bonds can be exhaustively employed for this purpose. Thirdly, since the introduction of Rupee-Dollar options in the Indian foreign exchange market in 2003, the market has seldom witnessed sizeable volumes. RBI could intervene in the currency options market which could serve the twin objectives of managing the exchange rate and gradual accumulation of reserves. And finally, the central bank should enhance the transparency in intervention operations by publishing intervention data on a daily basis which would promote further research on the effectiveness of intervention operations. High frequency data on exchange rate and intervention operations is a prerequisite for undertaking market microstructure studies.

CONCLUSION

Empirical analysis of the intervention operations of the RBI constitutes the integral part of the present study. It adopts Murray’s approach to estimate the profitability of the intervention operations of the RBI. Murray’s approach involves the estimation of realized profits, unrealized profits as well as net interest income arising from intervention operations. Total intervention losses amount to approximately 1.35% of the country’s GDP estimate (2003-04 at Factor cost)). Sterilization equation estimates confirm that intervention operations are almost completely sterilized, i.e. to the extent of around 96% of the actual intervention. The chapter concludes with the estimation of a GARCH model to identify the impact of intervention operations on exchange rate volatility. The estimated coefficient signifies the ‘volatility curtailing’ effect of the intervention operations of the RBI.

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AMIT KULKARNI

National Institute of Bank Management, India

Results