The RBI’sFinancial MarketsDepartment (FMD) participatesin the foreignexchangemarketby undertaking sales / purchases of foreign currency to ease volatility in periods of excess demand for/supply of foreign currency.Occupation:WorkingWorks For:NMIMS
Why is RBI stepping up its intervention in foreign exchange market?
Mumbai: The Reserve Bank of India ( RBI) is expected to step up its intervention in the foreign exchange market to prevent wild swings in the rupee ‘s value amid simmering geopolitical tensions on the Ukraine frontier, and ahead of the country’s biggest public share sale to date.
What is the Tobit model of RBI intervention in forex market?
taking up the patterns and efficacy of the RBI intervention in the forex market by using daily data collated from the press. A Tobit model is appropriate given that the apex bank carries out foreign exchange market operations intended to alter the development of the exchange rate only after the apparent necessity to enter the
Can RBI target exchange rate based on Reer-Neu-Tral?
relating to its intervention in the forex market. RBI has since deemed it unfeasible to target exchange rate based on REER-neu- tral. The RBI still does not make available the neutral REER value, nor does it make it available on a weekly basis. The REER statistics is made available only with a clear lag of two months. In a similar vein,
Will the bank intervene in the forex market?
tility, has a significant probability of the bank intervening in the forex market. The goodness of fit of the logit model can be conceived in terms of the correct predictions, that the negative interventions
What is MDER exchange rate?
However, after 1999 the official rate was discontinued and exchange rate became market-determined exchange rate (MDER). Under MDER the forces of demand and supply of dollars in India determine the exchange rate. The demand for dollars is downward sloping (lower demand when more rupees have to be offered and higher demand when lesser rupees have to be offered). Similarly the supply of dollars is upward sloping (less is sold when lesser rupees are offered and more is sold when more rupees are offered). Thus this interaction of demand and supply determines the exchange rate, at which the demand and supply of dollars balance out.
How does RBI prevent exports?
To prevent impact on exports under MDER, the RBI purchases dollars by creating an artificial demand for the excess dollars in circulation. Any act of purchase of dollars by the RBI impacts liquidity as rupees get released into the system creating inflationary pressures. In such circumstances the RBI simultaneously goes for the reverse repo auction to soak up the excess liquidity created on account of purchase of dollars by the RBI. The reverse repo auction is done under the Market Stabilization Scheme (MSS).
What is dirty float?
Any act of interference by a Central Bank like the RBI in influencing the exchange rate is called as ‘dirty floats’. But in India it is referred to as ‘managed floats’. In adverse circumstances of demand for dollars going up more than the supply of dollars, it results in rupee losing value ( depreciation).
Why does the government sell foreign currency?
In such circumstances the government has to sell foreign currency to augment the supply of dollars. However, the experience has been that more the currency is sold, more is the depreciation. Thus RBI instead of targeting any exchange rate, intervenes in the foreign exchange market only to manage the volatility and disruptions to the macro economic situation.
Why was the dollar used as an intervention currency?
Under this the dollar was used as intervention currency, which implied that primary exchange rate, all official government statistics would be dominated in U.S. dollar in terms of global trends and convenience.