BI moves to curb sudden
reversal of ‘hot money’

Bank Indonesia (BI) announced on Tuesday it would extend the minimum holding period of its promissory notes, SBIs, from one month to six months to mitigate potential sudden reversals of foreign short-term funds.

The central bank also decided to keep its benchmark interest rate at 6.75 percent as expected amid a sign of easing inflationary pressure.

BI Governor Darmin Nasution said on Tuesday that the longer SBI holding period would be effective on May 13, this year.

“We see it as necessary to lengthen the minimum holding period [of SBIs] to guard against speculative and short-tem investors. With the new policy, at least short-term funds [investors] could be reduced,” BI Governor Darmin Nasution said from his office in Jakarta.

The regulation, which was a surprise as the central bank had given no indications of its plans, forbids investors from trading SBIs in the secondary market until they have held them for at least six months.

Local and international analysts said ample global funds would continue to flood emerging markets such as Indonesia that generally offer higher returns this year.

Capital inflows have caused the appreciation of the rupiah, which in turn helped reduce import costs. The heavy inflows have also pushed up foreign currency reserves — which could be used to mitigate sudden reversals — to US$105.7 billion as of March-end, up 14 percent so far this year.

The influx of the short-term investments, also called hot money, has concerned the monetary authority because a sudden reversal could financially harm the country.

BI Deputy Governor Budi Mulya said the new minimum holding period of six months would “minimize negative impacts of short-term capital inflows toward monetary and financial system stabilities”.

By March-end, foreign investors owned Rp 77 trillion ($8.93 billion) in SBIs, 33.5 percent of the total Rp 230 trillion in outstanding SBIs.

Previously, investors had to keep their debt papers for at least one month, but were then free to sell the SBIs to shift capital offshore, contributing to the rupiah’s volatility.

Analysts said the new six-month minimum holding period would also reduce volatility of the rupiah, one of the top-gaining Asian currencies so far this year.

The rupiah has gained 3.6 percent so far this year as of Tuesday, trading at Rp 8,666 per dollar according to BI data. That compares with a 4.4 percent gain throughout last year.

“Rupiah gains have so far been able to calm inflationary pressures, especially those from the surging international commodity prices or imported inflation,” Darmin said.

Although maintaining the key BI rate at 6.75 percent, the central bank remains “vigilant on risks of inflationary pressures” due to surging international commodity prices, higher domestic demands and high inflation expectations, Darmin said.

“In the future, Bank Indonesia sees room for adjusting the BI rate level to calm further inflationary pressures,” he added, expecting the headline inflation to range between 4 to 6 percent by year-end, lower than the latest year-on-year inflation rate of 6.65 percent in March.

Indonesia, a domestic consumption-reliant economy, is fighting a battle against surging inflationary pressures and expectations that threaten people’s purchasing power.

The central bank, however, still sees strong domestic demand to support faster economic growth of up to 6.5 percent this year and 6.4 percent for the second quarter.

“The economic growth is supported by more balanced growth factors as investment grows and export performance remains solid,” Darmin said, citing transportation, communications, trade, hotels, restaurants and construction as the main drivers of growth.

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