B

ank Indonesia (BI) has signaled that it would maintain a hands-off approach and limit its intervention in the currency market in securing the fair value of the rupiah against foreign currencies.

'€œBank Indonesia will continue to maintain currency stability, but it does not mean that we have to intervene every time there'€™s a jolt in the market,'€ BI Governor Agus Martowardojo told reporters after Friday prayers in his Jakarta office. '€œWe want to let the market mechanism work.'€

Agus said the central bank '€œdid not intervene much'€ on Thursday, when the rupiah was under pressure due to massive sell-offs in the stock market.

The rupiah was dragged down due to a surge in capital outflows this week, with the currency recording its first weekly decline since January, after fund managers sold Indonesian assets on fears that the US Federal Reserve might hike rates sooner than expected, a move that would eventually tighten global liquidity.

The Jakarta Composite Index (JCI) slumped 2.5 percent on Thursday, as foreign investors recorded a net sell of Rp 537 billion (US$47.3 million).

The benchmark index closed at 4,700.22 on Friday, up a slight 0.03 percent compared to a day earlier, but down 3.6 percent on the week.

The recent sell-offs on the stock market exerted pressure on the rupiah, which depreciated 0.6 percent to 11,424 per US dollar this week, having previously rallied for six consecutive weeks, according to Bloomberg.

Despite the fall, the rupiah exchange rate remained at BI'€™s comfortable range of between 11,000 and 11,500 per US dollar, which should be seen as '€œquite a good'€ level to boost exports and rein in imports, BI Senior Deputy Governor Mirza Adityaswara stated in an interview in December, when the rupiah stood at 12,000 against the greenback.

Despite its hands-off approach, however, the central bank has declared its commitment to the market.

BI Deputy Governor Perry Warjiyo stated on Friday that intervention in the foreign exchange (forex) market, as well as in the secondary market of government bonds, would still be undertaken to stabilize the rupiah rate.

BI has been seen as minimizing its intervention in the currency market to deliberately weaken the rupiah, as part of its strategy to improve Indonesia'€™s current-account position.

Thus far, the central bank'€™s strategy has been seen as a success, with the latest data showing that the current-account deficit '€” the major worry among foreign investors '€” was halved to 2 percent of gross domestic product (GDP) in the fourth quarter last year, compared to 3.8 percent a quarter earlier.

'€œEver since the middle of 2013, BI has allowed the currency to weaken in times of stress, and I think they are continuing the same policy,'€ Sean Yokota, a currency strategist with Swedish bank SEB, wrote in an email from Singapore.

'€œAlso, the currency has appreciated over 5 percent this year, leaving BI with cushion for some weakness,'€ he said on Friday.

For BI, limited intervention in the currency market would further strengthen its forex reserves, which are on the upward trend, as the central bank'€™s dollar disposal stood at a nine-month high level of $102.7 billion by the end of February.