Rupiah fails to gain on Bank Indonesia rate hike

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.