USD/INR Volatility

The stated objective of the Reserve Bank of India when it comes to foreign exchange rates is that they want to maintain a “stable” exchange rate, and will step in only to curb volatility. There is no stated level at which the bank seeks to hold the rupee, and so it will intervene only when the rupee is volatile.

In this post, we will look at how the volatility in the USD/INR exchange rate has varied over the last seven years. For purpose of this analysis, we will use a 30-day Quadratic Variation as a measure of volatility (this is a lagging indicator, so the volatility number for today is the QV of the last 30 days).

The following graph shows both the level of USD/INR (black line, left axis) and the quadratic variation (red line, right axis).

Source: Oanda.com Volatility calculated as 30-day Quadratic variation
Source: Oanda.com
Volatility calculated as 30-day Quadratic variation

 

Notice that for most time periods, irrespective of the exchange rate, the RBI’s stated objectives have been met – the volatility in the exchange rate has been low for large period of time. Volatility of the exchange rate spiked once following the financial meltdown of late 2008 and again towards the end of 2011 (when Europe got into trouble).

It is interesting to note that for all the footage that the sliding rupee has received in the last month or so, the volatility of the rupee has been quite low (compared to the peaks). It will probably take a significantly higher volatility in the rate for the RBI to step in.

It is also interesting to note that in the second half of 2010, even though the rate level was fairly stable, volatility was significant!

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