Well-documented financial market, particularly stock market anomalies question the efficiency of financial market and hence hint towards inadequacy of the underlying model. Literature on foreign exchange market anomalies, either apparent or real, however, has not been so extensive. Due to its large trading activities, the foreign exchange market is often taken to be a liquid and efficient one. The issue of foreign exchange market efficiency is important as the prices of foreign assets, goods and factors of production depend largely on the changes in exchange rates. This paper, while addressing this issue explores the possible presence of calendar anomaly, specifically the day-of-the-week effect in the Indian Rupee-US Dollar exchange rate volatility over a period of January 1998 to April 2010. The emphasis on foreign exchange volatility stems from its huge impact on real economy, other financial markets, capital gain or losses from exchange rate changes and government intervention. With its aim to look for the presence of calendar anomaly to assess the impact of daily transaction mechanism on volatility, the study further explores the changing nature of calendar anomaly over the different volatility regimes. Such exploration will check whether calendar anomaly is a mere statistical aberration and time specific phenomenon. Using the ICSS test, the study finds five volatility regimes and strong presence of day-of-the week effect could be documented during the phases of high volatility. However, the Monday and Tuesday effects remained in all but one volatility regimes.
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