Rupiah fails to gain on Bank Indonesia rate hike

The Jakarta Post, Jakarta

The rupiah failed to take advantage of the central bank's latest move to hike its reference interest rate, as a still strong local dollar demand pushed the local unit to continue its decline against the U.S. dollar.

The rupiah was down again for the second consecutive day this week -- though only by a slight 0.4 percent -- as it closed at Rp 10,360 a dollar on Tuesday's modest trading.

The central bank's latest rate hike, however, did bring some positive sentiment to the local stock market also thin trading, as its Jakarta Stock Exchange Composite Index finished up 15.7 points -- or 1.5 percent -- to 1051.59 points from the previous trading day.

Bank Indonesia (BI) raised on Tuesday its benchmark BI Rate 50 basis points (bps) to 10 percent, in another effort to help bolster the beleaguered rupiah, as well as ward off a looming inflation rise.

Higher rates help the rupiah as it will make investments in the currency more attractive.

BI also announced other policies to ease the rupiah's recent volatility by tightening local forex trading, which includes continuing its intervention into the market, prohibiting banks from margin trading the rupiah against all other currencies, requiring them to improve their net open position, and offering them dollar hedging facilities.

Such policies will further help the rupiah as it absorbs excess market liquidity and reduces the possibility of it being used for speculative forex trading.

The rupiah had managed to break its 10-day fall to a four-year low last week, after BI hammered out a package of monetary policies, which included hiking the BI rate 75 bps to 9.5 percent and raising the minimum reserves banks must have at the central bank by up to 5 percent.

The rupiah, however, had to end its three-day advance over the greenback on Monday, following the government's failure to complement BI's policies with a clear fiscal action policy of its own -- holding off a fuel price hike to cut the fuel subsidy until after October.

The rupiah has recently been under pressure -- already depreciating by some 10 percent so far -- as soaring oil prices, Indonesia's declining oil production and rising fuel consumption are bloating the government's fuel subsidy -- denting the state budget's fiscal stability and investor confidence toward the currency.