The Indian exchange rate and Central Bank action: An EGARCH analysis

We analyze the impact of conventional monetary policy measures such as interest rates, intervention, and other quantitative measures, on exchange rate level and volatility, and compare these to the impact of Central Bank communication using dummy variables in the best of a family of GARCH models estimated with daily and monthly Indian data. Since India has a managed float, we also test if the measures affect the level of the exchange rate. We find variations in the Euro/Dollar rate strongly affect the Rupee/Dollar level and volatility. The interest rate differential has strong perverse effects, tending to increase variance and depreciate the Indian currency. News decreases volatility as it adds to scarce information. Domestic policy variables affect both level and volatility, and persist at the monthly frequency, but sometimes work at cross-purposes. Communication channels have potential but were not used effectively.