Rupiah up, BI steps in to defend currency

Rupiah up, BI steps in to defend 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.