Foreign Exchange Intervention Under the Integrated Policy Framework: The Case of India

IMF Working Papers, November 15, 2024

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The paper analyzes the effectiveness of foreign exchange intervention (FXI) in mitigating economic and financial shocks in India by applying the Integrated Policy Framework (IPF).
FXI can be a complementary tool in mitigating the tradeoff between output and inflation, specifically under large economic shocks amid temporarily shallow FX markets.
FXI can soften adverse impacts on domestic demand and output during severe risk-off shocks.
The benefits of FXI under normal conditions with liquid FX markets are limited.

Consider FXI as a complementary instrument within the IPF toolkit when large external shocks coincide with temporarily shallow FX market liquidity.
Under normal market conditions with liquid FX markets, prioritize other policy tools given the limited benefits of FXI.
Use FXI selectively to reduce the tradeoff between stabilizing inflation and supporting output during periods of severe risk-off shocks.

Analytical framework: Integrated Policy Framework (IPF).
Geographic focus: India.
Subject areas: Central bank policy rate; Currency markets; Financial markets; Financial services; Foreign exchange; Inflation; Integrated Policy Framework; Prices.
Keywords: Central bank policy rate; Currency markets; EM FX intervention proxy; foreign exchange intervention; FX Market development; Global; Inflation; Integrated policy framework; OTC FX turnover; rate Policy; RBI FX intervention; risk-off shocks.