This research work investigates the role of intervention by Reserve Bank of India (RBI) in foreign exchange market and money market in India. It is observed that domestic foreign exchange is efficient since forward premium captures market information. Purchasing power parity (for price index series) and interest rate parity hold true in Indian economy. In money market, change in interest rate in money market causes change in money in circulation however reverse is not true. In other words, RBI cannot manage interest rate in money market by controlling money in circulation through open market operation, which is crucial for foreign capital inflow. This is emerging challenge before RBI due to low efficiency of banking transmission system1.
Exchange Rate, Purchasing Power Parity, Market Efficiency, Open Market Operation, Interest Rate