New reserve rule will push down money supply: Report
New reserve rule will push down money supply: Report
JAKARTA (JP): The country's primary money supply increased by Rp 4.86 trillion in February to Rp 29.89 trillion following the introduction of a new reserve requirement, according to Bank Indonesia's annual report.
The average money multiplier of the narrowly defined money supply declined to 1.81 points last fiscal year from 2.03 the previous fiscal year, while the average money multiplier of the broad money supply dropped to 7.63 from 8.31.
Bank Indonesia said that the drop in the money multiplier was expected to further push down the money supply in the current fiscal year.
The growth rate of the narrowly defined money supply, which dropped to 14 percent in February, rose again to 18.4 percent in March. The downward trend in the money supply is expected to continue despite the increase in March, given the significant growth in the primary money supply.
The growth rate of the average money multiplier dropped to 21.5 percent in 1995/1996 from 22 percent in the previous fiscal year.
Net foreign assets contributed around Rp 9.1 trillion to the expansion of the average money multiplier, which reached Rp 232.5 trillion as of March, the end of the 1995/1996 fiscal year. In the previous year, the net foreign assets suffered a contraction of Rp 4.1 trillion.
According to Bank Indonesia, the substantial growth in the net foreign assets in 1995/1996, was fueled by a significant increase in foreign direct investments and the massive inflow of offshore funds.
The foreign assets were used as loans by financial institutions and as financing sources by the private sector, the report said.
The report said the increase in offshore funds was fueled by the high differential of interest rates at home and those overseas, in addition to an improvement in the performance of the domestic capital market.
The central bank's tight monetary policy significantly eased the liquidity which, in turn, pushed up the domestic interest rates. As a result, local interest rates stayed high through the year while the direction of overseas interest rates was mostly downward. This condition made the local money market very attractive.
In order to minimize the negative impact of speculative trading on the money market, the central bank widened in June last year the spread of conversion rates of the rupiah against the dollar from Rp 30 to Rp 44. The spread between the selling and buying rates of the rupiah against the dollar was merely Rp 10 in 1992.
In July 1995, the central bank also lifted the swap facility in a bid to improve the role of commercial banks in foreign exchange transactions. In addition, Bank Indonesia also widened the rupiah-dollar intervention band to Rp 66 or 3 percent. The band was further widened last week to Rp 118 or 5 percent.
According to the report, the expansions in the spread of the conversion rate and the intervention band have significantly strengthened foreign exchange trading on the domestic market.
Commercial banks' dependence on the central bank in foreign exchange transactions could be also be reduced.
Interbank transactions of foreign exchange rose significantly to $1.06 trillion in 1995 from $822.7 billion in 1992. The transactions of foreign exchange between commercial banks and the central bank, in turn, declined to $6.7 billion from $11 billion. (hen)