BI issues new measure as rupiah dives deeper
Bank Indonesia (BI) announced on Tuesday a new monetary instrument to add US dollar supply as the rupiah remained under pressure due to the lack of greenbacks.
A dollar shortage has been seen in the nation’s financial market as demand for safe instruments rose on resurgent fears that the global economic recovery would stall over a potential Greek euro exit and China’s economic slowdown. The reluctance of those holding dollars to sell their greenbacks and the tendency of local banks to store their foreign exchange (forex) overseas exacerbated the sell-off, analysts said.
As of 4:38 p.m. on Tuesday, the rupiah traded at its lowest level in 30 months at Rp 9,606 per US dollar, according to local banks’ prices compiled by Bloomberg. Foreign investors have dumped Rp 6.7 trillion (US$716.9 million) in Indonesian stocks and about Rp 4 trillion in government bonds and afterwards demanded US dollars in exchange for their sold rupiah assets.
Rumors that BI would impose capital controls, which the central bank strongly denied, also spiked the rupiah rate to about Rp 10,000 per US dollar at the non-deliverable forward (NDF) market in Singapore — further creating panic rupiah-selling in the domestic market.
To boost the dollar supply, in two weeks BI will start issuing “forex term deposits” — a deposit-like instrument with tenures of between seven days and one month, allowing banks to deposit their dollars at the central bank rather than overseas, the BI board of governors said.
“If [local banks’ forex] is stored overseas, our market is dry. When we offer better forex placement at BI, we will give returns in line with offshore rates and we could draw in forex and use it to fill in the shortage,” BI Governor Darmin Nasution told reporters.
Indonesia’s commercial banks held Rp 405.74 trillion in forex third party funds — including savings and deposits — as of March this year and had Rp 371.72 trillion in outstanding forex loans.
BI’s forex term deposit will offer “competitive rates” for banks to invest their foreign currencies, BI deputy governor Halim Alamsyah said, citing between a 0.1 and 0.2 percent return offshore and about 0.3 percent in the domestic market.
Onshore forex data shows between $400 to $500 million transactions per day, but offshore transactions by domestic banks topped $2 billion per day, he added.
“So the potential [to draw in forex liquidity] is huge and it could be circulated back into the domestic market and help our liquidity supply,” Halim said during a meeting with the press.
Analysts were skeptical that the impact of the new instrument would be huge on the rupiah’s stability because it may be viewed by the market as too reactive toward current currency volatility, though many welcomed it as a new alternative for banks to store their excess forex liquidity in the domestic market.
“We fear that this is only lip service, but BI should give more competitive rates compared with those offered in offshore markets. Otherwise, domestic banks will not withdraw their funds stored overseas,” said Juniman, an economist at Bank Internasional Indonesia.
“In the short term, if communication is not done correctly by BI, the [new instrument] would receive a negative market response, because it shows that BI is panicking because of a weakening rupiah. Speculators might take advantage of this new information.”