Rupiah free float<\/p>\n
Bank Indonesia's decision on Thursday to float the rupiah has
\ndramatically changed the currency market as speculators no longer
\nhave a particular zone (trading band) to aim at.<\/p>\n
Previously, the central bank, like a target in a shooting
\ngallery, was fully exposed to the bright lights while the
\nspeculators (shooters) were hidden in the dark. Now the game has
\nbeen reversed.<\/p>\n
The central bank's move was taken after several weeks of
\npersistent, speculative assaults on the rupiah amid the regional
\ncontagion of the currency crisis which began early last month. It
\nis now up to the central bank to decide when to hit the
\nspeculators.<\/p>\n
The already tumultuous foreign exchange market was predictably
\nshocked by the move as, until Wednesday, the central bank was
\nstill determined to defend the trading band it set last month.
\nSpeculators, now deprived of the parameters for the central
\nbank's intervention to defend the rupiah rate, panicked and the
\nrupiah fell to a new historic low of 2,800 to the U.S. dollar
\nduring morning trade.<\/p>\n
Most analysts, including the International Monetary Fund,
\nwelcomed the move. Further widening the rupiah trading band, from
\nthe 2,378-2,682 range set on July 12, would provide the jittery
\nmarket with another target to shoot at. This would force the
\nmonetary authorities to remain preoccupied with short-term
\nmeasures which could eventually affect the long-term state of the
\neconomy.<\/p>\n
Bank Indonesia's Governor Soedradjad Djiwandono said the
\nmeasure was not actually free float in the purest sense because
\nthe central bank would intervene to keep developments on course.
\nThe only difference now is that the central bank no longer sets
\nan intervention band.<\/p>\n
It will instead keep to itself the most appropriate range for
\nthe rupiah exchange rate as seen from the macroeconomic
\nobjectives of encouraging private savings, bolstering exports and
\nwooing capital flows.<\/p>\n
This means that despite the free float the rupiah market will
\nnot be allowed to behave like, for example, the grocery market
\nwhere the prices are determined entirely by the supply and demand
\nequation. True, under the free float system, market forces will
\nbe the main determinant of the rupiah equilibrium rate but the
\ncentral bank still commands several instruments. The interest
\nrate mechanism to steer the rate toward the range desired to
\nsupport the broader economic objectives, is one example.<\/p>\n
The market players will have to bear all the risks of exchange
\nrate fluctuations as they are now in the dark about the threshold
\nrate for central bank intervention. Speculators will not know
\nwhen the central bank plans to beat them at their own game.<\/p>\n
The biggest problem in the currency market now is that the
\nshort-term rates are influenced not by economic fundamentals and
\nsupply and demand equation but mostly by expectations of
\nappreciation or depreciation of the currency.<\/p>\n
The commercial demand from companies for a foreign currency,
\nfor example, for paying imports and servicing foreign debts, very
\nrarely causes wild volatility in exchange rates.<\/p>\n
It is the demand from portfolio investors (speculators) that
\nusually is most responsible for a currency fiasco. This is
\nbecause they use a currency not as a bill of exchange but as a
\ncommodity to be traded (hedged against expectations of
\nappreciation or depreciation).<\/p>\n
Since the funds they control are huge they could easily drive
\nup or depress a currency and central banks which try to fight
\nagainst these speculations do so at great costs, not only to
\ntheir foreign reserves but also to economic stability. Moreover,
\nspeculative attacks may force central banks to resort to ad hoc
\nmeasures at the expense of their long-term economic fundamentals.<\/p>\n
What has been irking monetary authorities, especially in the
\ncurrent era of globalized financial market, is that the
\nspeculators' expectations are often irrational and influenced by
\nwild rumors irrelevant to the economic fundamentals on which the
\nrate of a currency is founded.<\/p>\n
But now as the rupiah is on a free, managed float, it becomes
\neven more imperative than ever for the monetary authorities to
\nsee to it that the rupiah market operates as efficiently as
\npossible. This requires timely, credible information on the key
\neconomic indicators such as balance of payments position (notably
\ncurrent account deficit), inflation and interest rate policy to
\nallow for a fairly efficient market based on rational
\nexpectations.<\/p>\n
The immediate domestic agenda is to prevent the general public
\nfrom panicking as businesspeople have yet to become accustomed to
\na free floating rate. The rupiah rate will predictably fluctuate
\nwidely during the next few weeks until the market forces fully
\nabsorb all the information available and set the equilibrium rate
\nfor the rupiah.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rupiah-free-float-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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