Official Intervention and Exchange Rate Determination: Evidence from India

Despite the adoption of a market-oriented regime, Reserve Bank of India explicitly practices sterilized intervention to normalize unfavourable developments in the market. This study seeks to find empirical evidence on the intensity to which the monetary authority was able to achieve its policy objective of directing exchange rate in the anticipated trail. The study employed an Autoregressive Distributed Lag (ARDL) model to estimate the central bank reaction function in this regard. It was found that 1% purchase of foreign exchange reserve (net intervention) depreciated Indian Rupee by 0.255% for long-term. Whereas in short-term, intervention followed “leaning against the wind” policy to curb market vagueness. The findings of the study recommend that there should be more coordinated approach between official intervention policy and monetary policy formulation in consonance with the economic fundamentals for increasing the effectiveness and sustainability of the intervention operations.

Perverse Effects of Non-sterilized Interventions on Spot Foreign Exchange Rates

We study the effects of non-sterilized intervention on a spot foreign exchange (forex) rate using a multi-period game-theoretical model which involves an unspecified number of competitive traders, a finite number of strategic traders (forex dealers) with heterogenous initial money balances, and the central bank of the home country. Simulating the subgame-perfect Nash equilibrium of the two-stage game played by the forex dealers in each period, we show that the non-sterilized intervention of the central bank may lead to a perverse effect on the spot forex rate. We call the mechanism underlying this effect strategic trade switching channel that works when an increase in the central bank’s forex currency demand (supply) exerts such a big upward (downward) effect on the forex rate that some sufficiently big dealers, who optimally bought (sold) forex currency in the previous period when the forex rate was sufficiently low, find in the current period selling (buying) it more profitable, thus moving the forex rate in a direction undesired by the central bank. JEL Classification: D43, F31, G20

Effectiveness of Policy Instruments

This chapter assesses evidence on the effectiveness of various policy tools—foreign exchange (FX) intervention, nondiscriminatory macroprudential policies, capital controls, and currency-based prudential measures. When it comes to macroeconomic imbalances, sterilized FX intervention can be used to mitigate currency-appreciation pressures, and both sterilized intervention and macroprudential measures to curb domestic credit growth. As regards financial fragilities, capital controls can be used to tilt the composition of external liabilities away from riskier flows and restrict excessive foreign borrowing by the financial sector. Conversely, to limit foreign currency-denominated lending in the economy, currency-based macroprudential measures are strongly effective, with capital controls on inflows a possible alternative. The chapter's findings also show a significant association between the economy's resilience during crises and residency-based capital controls or currency-based prudential measures that help prevent the buildup of balance-sheet vulnerabilities.

KEBIJAKAN PENGENDALIAN ALIRAN MODAL MASUK DI INDONESIA

Sejak tahun 1990 - 1996 Indonesia menerima aliran modal asing dalam jumlah besar. Untuk meredam dampak negatif dari aliran modal masuk tersebut otoritas moneter mengambil kebijakan berupa sterilized intervention, peningkatan Giro Wajib Minimum (GWM), konversi deposito pemerintah dan sistem nilai tukar mengambang terkendali dengan band intervensi yang semakin longgar.Dari hasil pengujian secara empirik terbukti bahwa kebijakan tersebut cukup efektif dalam meredam dampak negatif aliran modal asing tersebut. Namun demikian, mengingat modal asing yang masuk bersifat sistemic maka kebijakan tersebut tidak dapat digunakan secara terus-menerus. Apalagi hasil pengujian membuktikan bahwa ada hubungan kausalitas 2 arah antara ketidak-seimbangan transaksi berjalan dan transaksi modal.Untuk mencegah krisis dikemudian hari, sistem nilai tukar mengambang bebas merupakan pilihan terbaik yang harus dibarengi dengan penggunaan instrumen kebijakan secara fleksibel dan didukung sistem keuangan yang kuat dan sehat.