Central bank to tighten forex trading, effective July 14

Central bank to tighten forex trading, effective July 14

Dow Jones, Jakarta

Bank Indonesia, the central bank, said it will tighten foreign exchange transaction rules starting July 14.

The new rules will cut foreign exchange derivative transactions with foreign counterparts against the rupiah to a maximum of US$1 million from a previous total of $3 million, the central bank said in a statement posted on its Web site late Wednesday.

The statement said dollar purchases in outright forward transactions and swaps are also limited to a $1 million total. These types of transactions previously weren't subject to any cap.

The central bank has also imposed a three-month minimum investment hedging period on foreign-exchange transactions. Previously, such deals had no minimum periods.

Bank Indonesia officials weren't immediately available to comment on the rule changes.

The new regulations are likely part of the central bank's ongoing effort to support the rupiah and stabilize the currency in the foreign-exchange market.

Such efforts have gathered pace in recent months as part of a bid to offset a slide in the rupiah against the U.S. dollar.

The slide culminated in a three-year low of Rp 9805 to the dollar at the end of April, linked to massive dollar buying by the state oil firm Pertamina. The company's dollar demands have surged in recent months due to record-high oil prices.

Accelerating inflation has also put pressure on the rupiah. Indonesia's consumer price index rose at a three-year record pace of 8.81 percent on year in March, due to a 29 percent average hike in fuel prices after the government eliminated budget- crippling fuel subsidies.

The bank's move to tighten foreign-exchange transactions is welcomed by some as a way of deterring speculation. But there are concerns that potentially thinner trading and lower volumes could be the result.

This could make the rupiah more vulnerable to genuine dollar- purchases by Indonesia-based companies.

One Jakarta-based currency trader said the new rules will likely spark a flurry of position-squaring in the period up to the introduction of the regulations on July 14.

"There's going to be some volatility, as people tend to square their positions as they digest what the new regulations mean," the trader said.