Rupiah drop still under control, says BI chief

Tony Hotland, Jakarta

The current depreciation in the rupiah against the U.S. dollar would not have a severe impact on the economy as it is still manageable, Bank Indonesia Governor Burhanuddin Abdullah said on Thursday.

He said that the central bank's main policy to help arrest the fall in the rupiah was by absorbing excess liquidity in the banking sector.

"Of all the worst scenarios we can think of, the impact will still be in a corridor that we can handle. No need to worry, it's not that bad since our condition is better than in 1997/1998," said Burhanuddin Abdullah, referring to the regional financial crisis in the late 1990s.

He was speaking at a meeting with House of Representatives Commission IX on financial affairs to explain the central bank's strategies to handle the weakening rupiah.

Burhanuddin said that BI would maximize its efforts to absorb excessive liquidity in order to minimize space for banks to speculate against the local unit.

"We'll do it through the SBI promissory notes auctions, a tighter policy on the minimum bank reserve requirement, and the intervention rate. The important thing is how to keep the inflation rate favorable to our economy," he said, referring to the Bank Indonesia SBI promissory notes.

Bank Indonesia has recently introduced a number of measures, including increasing the bank reserve requirement to between 6 percent and 8 percent in a bid to mop up excess liquidity.

The rupiah recently dropped to a 26-month low as the looming interest rate hike in the U.S. triggered a switch to dollar-based assets, while political uncertainty at home in the run up to the July 5 presidential election had further dampened sentiment in the local unit.

The local currency has slightly strengthened following Bank Indonesia's tightening measures. The local unit closed on Thursday at Rp 9,405 per U.S. dollar, relatively unchanged from Wednesday's close of Rp 9,400.

The sharp drop in the rupiah has sparked inflation concerns, particularly coupled with rising oil prices.

But Burhanuddin played down such fears, saying that inflation this year would not surpass the government's target of 6 percent to 7 percent.

A number of analysts have also suggested that the central bank push the interest rate higher to curb inflation and help defend the rupiah, a move which has been avoided by the central bank as it would slow down the country's economic growth.

Central bank officials have said that the bank would not increase interest rate here if the U.S. Federal Reserve only raise its rate by 25 basis points, as many expected.

Meanwhile, BI deputy governor Hartadi Sarwono said that the central bank was also cooperating with other central banks in the region, including the ASEAN-plus-three countries (Japan, Korea and China) in a bid to protect the local currencies.

"We have what we call a bilateral swap arrangement with the central banks of those countries. Under the arrangement, there are funds of up to $5 billion that we can periodically borrow. But in this kind of situation, we don't think we need to go there yet," he explained.