B

ank Indonesia (BI), the central bank, emerged triumphant in its latest currency stabilization battle after a bold move to pour dollars into the market succeeded in preventing the rupiah'€™s steep depreciation from turning into a panicky spiral.

The rupiah strengthened on Friday for the third consecutive day as it appreciated 65 basis points to 12,500 per US dollar according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

It was a reversal in fortunes from earlier this week after the rupiah depreciated by 468 basis points, or 3.8 percent, within two days to touch 12,900 per dollar, the lowest level since the 1998 Asian financial crisis.

'€œBank Indonesia has managed to reduce market volatility after the Indonesian rupiah went above 12,900 per dollar on Tuesday by intervening in the foreign exchange market,'€ said Sjarif Gunawan, head of global sales with Bank CIMB Niaga in Jakarta.

Most Asian currencies declined this week as global fund managers '€” in response to falling oil prices, a currency crisis in Russia and uncertainty over monetary policy in the US '€” moved to reposition their riskier asset classes stashed in emerging markets.

But the recent steep fall of the rupiah, which was seen as going too far, was a one-off reaction that was not supported by fundamentals, analysts say.

Sacha Tihanyi, a senior currency strategist with Toronto-based Scotiabank, argued that the substantial deficit in Indonesia'€™s external position had exacerbated the transmission of financial market volatility to the rupiah.

'€œI'€™d expect the central bank to continue to smooth sharp, temporary spikes in volatility and provide sufficient liquidity to the market,'€ he wrote in an email interview.

'€œThey are unlikely to pursue anything overly aggressive, such as targeting a particular rupiah value to stabilize the exchange rate,'€ Tihanyi predicted.

BI'€™s move to increase the magnitude of its intervention in the currency and bonds market this week came after the central bank had been seen as reluctant to take such actions throughout this year, as it had deliberately weakened the currency at an '€œundervalued'€ level to boost exports and rein in imports.

Despite the strong capital inflows coming into Indonesia in the third quarter, which led to a US$6.5 billion surplus in balance of payments during that period, the rupiah weakened below 12,000 per dollar by the end of October.

'€œIf people ask us: '€˜Did Bank Indonesia intervene when the rupiah hovered at the level of 12,100-12,200 [per dollar]?'€™ The answer is no, because we see such a level as ideal for our economy,'€ said BI Senior Deputy Governor Mirza Adityaswara.

'€œA country that still runs a current-account deficit might need a somewhat undervalued currency,'€ he added.

Analysts say that BI, throughout 2014, has used its dollars carefully as the central bank was trying to strengthen its foreign exchange (forex) reserves, in preparation for capital outflow and the risk of financial shocks when the US starts to tighten its monetary policy next year.

BI'€™s forex reserves, used by the central bank to supply dollars and intervene in the market to stabilize the rupiah, stood at $111.1 billion by the end of November, rising from $100.6 billion in January.

Indonesia has among the lowest forex reserve coverage ratios in the region, as its dollar disposal is only sufficient to cover 6.4 months of imports and debt payments, compared to approximately 8 months in Malaysia and India, and 11 months in the Philippines.

'€œWho in Asia is vulnerable to a bout of poor sentiment? Countries with low foreign currency reserves and or large amounts of foreign borrowing,'€ warned David Carbon, an economist with Singapore-based DBS Bank.

'€œGenerally, that means India and Indonesia.'€