BI to absorb Rp 13t through SBI auction

JAKARTA (JP): Bank Indonesia is tightening the money supply by offering Rp 13 trillion (US$1.01 billion) in one-month promissory notes (SBIs) for auction today.

A state bank's head of treasury division predicted yesterday that the central bank would most likely absorb less than its target as much of the excess rupiah funds had not yet entered into the banking system.

"Looking at the size it offers, the central bank seems to view that the banking system is enjoying excess liquidity. But that is not the case," the treasury head said.

"Therefore, I don't think Bank Indonesia can sell all its Rp 13 trillion in SBIs tomorrow (today)."

Bank Indonesia last week auctioned for the first time since the crisis started Rp 13 trillion in SBIs. However, it managed to raise only Rp 6.9 trillion, with a weighted average rate of 65.16 percent.

Local financial market analyst Iskandar Rusnawie welcomed the central bank's move to absorb public funds through SBI auctions and intervention.

He said rupiah supply in the market was so excessive that it could push up inflation.

"I suspected that massive public withdrawals of funds from Bank Central Asia a few months ago caused excess liquidity in the market as the central bank had pumped a huge amount of money into BCA to keep it afloat," he said.

In late May there was a run on BCA, which is controlled by former president Soeharto's children and close ally Lim Sioe Liong, following Soeharto's resignation from power. The run forced the bank under the management of the Indonesian Bank Restructuring Agency.

Money market dealers said the central bank's move to start weekly auctions of one-month SBIs had capped interbank interest rates.

Manaek Robert L. Toruan, head of the fixed income desk in Bank Niaga's treasury division, said the central bank should conduct more auctions of SBIs for more maturities to let the market determine the rates.

He suggested that the central bank move its money market intervention to the afternoon session only to give the market more room to breath.

The central bank could intervene in the money market if the regular auction missed its target.

"If BI enters the market in the morning, the interbank market would be dry because banks with excess liquidity would chose to place their funds in SBIs rather than in other banks in need of funds," he said.

"But if BI enters the market in the afternoon, or not at all, banks with excess liquidity will be forced to put their funds in the interbank market." (rid)