JP/13/BI
Rupiah gains as central bank steps in to defend the currency
The Jakarta Post Jakarta
The rupiah bounced back on Tuesday from its recent slide against the dollar, following the central bank's latest market intervention and its unveiling of a new arsenal of monetary measures to defend the local currency from future volatility.
The rupiah closed at Rp 9,688 on Tuesday, up from a three-year low of Rp 9,750 the previous day, after Bank Indonesia (BI) bought up an estimated of US$150 million worth of dollars in the spot market. The government's sale of Rp 3 trillion (some $312 million) in domestic bonds also helped absorb excess market funds and raise the rupiah.
The gain -- the largest since January, according to Bloomberg -- also occurred on the back of BI's plans to pass a raft of emergency measures to prevent the rupiah from sliding further against the greenback. These measures includes continuing to raise the interest rate on its benchmark SBI promissory notes, as well as rolling out new debt and currency swap instruments.
The central bank also slashed commercial banks' net open position, and will consider raising their reserve requirements at BI as well if necessary.
BI governor Burhanuddin Abdullah said on Tuesday the central bank would continue raising its SBI interest rate to mop up any excess liquidity in the market. "There is an open possibility to further raise the interest rate by between 15 and 20 basis points."
BI raised the SBI interest rate 17 basis points from 7.53 percent to 7.7 percent at its last auction. Another auction for the one-month SBI notes is scheduled for next Wednesday.
The one-month -- and three-month -- SBI notes are among the central bank's money market instruments, in addition to its Bank Indonesia Facility (FASBI), in which commercial banks can park their excess funds for a week at a current interest rate of 7.25 percent.
To address the shortcomings of current instruments in absorbing excess liquidity, however, BI senior deputy governor Miranda Gultom said in an interview with Dow Jones that the central bank was also preparing additional monetary measures, consisting of a new debt instrument and a currency swap mechanism for commercial banks.
The central bank began offering on Tuesday its new, three-day Fine Tune Kontraksi (FTK) debt instrument, which carries an interest rate of 3.625 percent, to help absorb excess market liquidity.
The planned currency swap mechanism -- which allows hedging transactions -- would help importers to better plan their future dollar needs, therefore relieving pressure on the rupiah.
Elsewhere, Burhanuddin said that BI would return the level of commercial banks' net open position of equity capital back to 20 percent, after raising it in January to 30 percent in accordance with the international Basel core banking principles.
"The level is effective as of today (Tuesday)," he said.
A tighter net open position is expected to help the rupiah, as commercial banks will have less room to speculate against the local currency using their huge rupiah liquidity.
"And if there continues to be excess liquidity, then there is also the possibility of increasing the reserve requirement of the banks," Burhanuddin added.
Commercial banks must at present maintain a minimum 5 percent reserve at the central bank. Similar to tightening the net open position, a higher reserve requirement would leave less room for banks to use their excess funds for foreign exchange speculation.