Exchange market pressure and the Reserve Bank of India's intervention activity

This paper formulates and estimates a small open economy model. From the estimates of the model, a measure of exchange market pressure and an index of intervention activity are constructed. The analysis of these two parameters highlights the fact that the Reserve Bank of India prefers to accommodate rupee depreciation, while aggressively preventing appreciation. The net sale of foreign exchange is resorted to only in times of crises. The impact of direct intervention is not found to be effective, as major part of the capital inflow is being sterilized. However, the large amount of foreign exchange reserves that the Reserve Bank of India has built up bears ample testimony to the Bank's intervention. (C) 2003 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.