T

he central bank, Bank Indonesia (BI), defended its intervention in the foreign exchange market saying that the practice is needed to protect the rupiah even though it has contributed to the deterioration of foreign exchange reserves in recent months.

BI Deputy Governor Halim Alamsyah said in Jakarta on Friday that central bank market intervention had successfully boosted confidence among investors in the forex market, as reflected by the stabilization of the rupiah and the increase in the flow of foreign funds into the country.

“We are trying to pump liquidity into the market — that’s why our forex reserves are depleted. But, recently we see that the policy has been quite a success,” Halim told reporters at BI headquarters.

The rupiah, the worst-performing currency in Asia last year, strengthened 0.3 percent to average at 9,680 per dollar in February. A more stable rupiah has helped improve investor confidence in the local stock market.

“The market is already comfortable with the situation,” said Halim, pointing out that US$2.3 billion of foreign funds came into the country in the first two months of the year, as compared to $6 billion in the whole of 2012.

BI’s forex reserves fell to $105 billion, the lowest level in two years, in February, compared to $109 billion in January.

The decline means that BI’s forex reserves have declined for two consecutive months. At the end of December they touched $113 billion, the highest level for six months.

The sharp decline in forex reserves has raised concern over future intervention, given the high demand for dollars in the coming months.

Halim is optimistic about an improvement in dollar liquidity soon, on the back of optimism of faster global economic recovery to boost exports and, ultimately, pour additional dollar-based export proceeds in the currency market.

“We see exports improving in the second half. Several indicators, especially those coming from our main trading partners such as China, show that their economies are improving,” the deputy governor said.

Economists say that the depleting forex reserves will breed negative sentiment towards the rupiah among investors, who will prefer foreign currencies on fears of future rupiah depreciation.

“Depletion in reserves will, to some extent, raise concern on holding rupiah assets although the current level, equal to 5.7 months of imports and government debt services, is still above the International Monetary Fund three month threshold,” Mandiri Sekuritas analysts led by Aldian Taloputra wrote in a research note released on Friday.

The rupiah currency was the worst performing among Asia’s 11 most-traded currencies last year, weakening 5.9 percent.

On Friday, the rupiah’s one-month non-deliverable forwards strengthened 0.1 percent to 9,703 per dollar. They traded at a 0.2 percent discount to the spot rate, which climbed 0.1 percent to 9,688. A daily fixing used to settle the rupiah derivatives was set at 9,688, from 9,699 yesterday by the Association of Banks in Singapore.