The central bank expects the rupiah to strengthen by the end of the year as foreign direct investment (FDI) into the country picks up and the economy continues to improve.
"The rupiah should be able to stabilize this year, with a chance of strengthening in the last quarter of the year," Bank Indonesia (BI) Senior Deputy Governor Miranda S. Goeltom said Tuesday at an investment seminar.
"We expect this (rupiah gains) can be sustainable from an inflow of FDI and portfolio investments as the investment climate and the whole economy improves, along with a continued strengthening of currencies in the region."
She did not mention the level BI expects the rupiah to stabilize at.
The rupiah ended unchanged against the U.S. dollar at Rp 9,475 on Tuesday. It slipped to Rp 9,555 during mid-day trading, but managed to rebound later on, halting its two-day fall on profit taking from Rp 9,345 last Thursday -- its highest level since March last year.
The government has set a rupiah rate of 9,900 to the dollar in this year's state budget.
Miranda said the currency was finding its fundamental support from the still high interest rate difference with the greenback, making rupiah-denominated assets more attractive to investors.
Recent improvements in Indonesia's macroeconomic conditions -- particularly in the easing of inflation -- have also contributed to further market confidence in the rupiah, while the U.S. Federal Reserve's tight monetary cycle is also expected to end this year.
BI has since July last year also upped its benchmark interest rate six times from 8.5 percent, part of the effort to support the rupiah -- which slumped to a four-year low of 11,000 last August amid high oil prices -- and tame surging inflation following the government's double fuel price hike last year. It left the BI Rate unchanged at 12.75 percent earlier this month.
However, Miranda warned of the possibility of another oil price shock this year and that the Fed may persist with the tight monetary cycle, resulting in pressure on rupiah. BI also sees monthly inflation ranging between 1 percent and 3 percent throughout the year.
For this, she said, BI would still "cautiously maintain a tight-biased monetary policy until the second half of the year, but may relax it by the third quarter.
"This means interest rates may stay or still rise a little, but go lower in the third quarter".
Currency analyst Pardi Kendy agreed with BI's cautious approach, warning the public not to prematurely rejoice for the rupiah.
"The rupiah is still supported only by short-term portfolio investments, not yet the more sustainable FDIs," he said.
Separately, the chairman of the Indonesian Chamber of Trade and Industry, M.S. Hidayat, was quoted by Detik.com as saying that a stable rupiah between Rp 9,500 and Rp 9,800 would be favorable for the business climate.
Vice President Jusuf Kalla had also stressed the importance of stability of the rupiah at Rp 9,500 to Rp 10,000 for the economy, instead of the risk of rapid gains.
Miranda also said that as part of the central bank's efforts to support the rupiah this year, BI is considering using government bonds from the secondary market as a monetary instrument to absorb excess market liquidity. BI plans to increase its holdings of the bonds from Rp 10.5 trillion to between Rp 50 and Rp 60 trillion.
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