As the rupiah dropped below the 10,000 per US dollar psychological threshold this week, thoughts turned to Bank Indonesia ( BI ) and whether the central bank can safeguard the currency from entering a downward spiral.
On Tuesday, the rupiah went as low as 10,111 in midday trading, before closing at 9,828 according to Bloomberg.
The last time the rupiah dipped below the 10,000 mark was Oct. 2008 in the global financial collapse caused by the US sub-prime mortgage crisis.
BI spokesperson Difi Johansyah explained that pressure on the rupiah heightened over the last few days as dollar demand increased for business repatriation and foreign debt payments. Simultaneously, foreign investors pulled portfolio investments in emerging economies due to uncertainty over US quantitative easing, he said.
'Today we have intervened and the rupiah closed around 9,830,' Difi said on Tuesday. 'We will remain in the market to safeguard the rupiah. We are ready to fight today, tomorrow, and in the coming days.'
Even as the rupiah breached the psychological resistance, analysts doubted whether BI can go all out in intervention, due to its depleted foreign exchange ( forex ) reserves, which stood at $105 billion at the end of May.
As the $100 billion reserve threshold approaches, BI may be reluctant to deplete it further for fear of undermining confidence, a Bank of America Merrill Lynch research note read.
Analysts have expressed disappointment in BI's failure to provide an adequate dollar supply at times when demand is high, like now, which contributes to the volatility of the rupiah.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed 72 basis points to 14 percent on Monday, according to Bloomberg.
'The rupiah market is volatile because BI did not make an even distribution of dollars in local banks. Some big banks have an ample supply, while others face shortages,' said a Jakarta-based forex trader.
When selling dollars, BI gives special preference to state-owned banks to buy dollars at a cheaper price, the trader claimed. There are cases when banks such as Bank Mandiri can buy dollars at Rp 9,800, while joint-venture and foreign banks must buy them at Rp 10,000.
'This not only causes a liquidity shortage in the market, but allows speculation. Traders can arbitrage buying dollars in one bank and selling to another.'
When asked for confirmation, Difi argued that BI had to be careful with forex reserves. 'Before using dollars to stabilize the currency, we must know which banks have the most impact. Some banks have more impact than others,' he said.
Last month, BI introduced the Jakarta Interbank Spot Dollar Rate ( JISDOR ), a reference rate that BI expected to shield the rupiah from speculators playing offshore. JISDOR stood at 9,821 on Tuesday, but analysts say JISDOR is costly for BI and forex reserves. JISDOR is published at 10.00 a.m. but the market closes at 4.00 p.m., so BI must intervene to prevent the closing rate from deviating too much.