B

ank Indonesia (BI) launched on Wednesday its second monetary policy package. The package is expected to further stabilize sharp fluctuations in the rupiah exchange rate and reduce the gap between foreign exchange (FX) demand and supply.

The package comprises several measures, ranging from intervention in the forwards market to higher transparency requirements in foreign exchange traffic. The package is a follow-up to a previous bundle of policies introduced on Sept. 9.

In a press conference, BI senior deputy governor Mirza Adityaswara said that the central bank would begin entering the forwards market to reduce pressures in the spot market that impacted the rupiah.

'€œWe usually intervene in the spot market. However, there is now a gap in the forwards market between demand and supply, and we want to balance them,'€ he said, without providing details on the gap figure.

The spot market is where FX is traded immediately for delivery, while the forwards market sees trading of FX occur at a specific time and at an agreed price. BI'€™s intervention in the forwards market can be conducted either bilaterally or through auctions and will begin in October.

The central bank has also broadened the scope of underlying FX forward selling to include foreign denominated time deposits, either onshore or offshore. The new underlying requirement will be put into practice in October.

BI has issued new monetary instruments as well in the form of three-month BI deposit certificates (SDBI), two-week domestic treasury notes (SBN) reverse repo and foreign-currency denominated BI securities (SBBI).

The SDBI and SBN reverse repo were officially introduced two weeks ago, whereas the SBBI will be issued in late October at the earliest.

'€œThe SDBI and SBN reverse repo are part of our open market operation to shift rupiah liquidity to long-term instruments from short-term instruments. That way we can reduce liquidity that could otherwise be used for speculative transactions,'€ Mirza said.

The new measures highlight the central bank'€™s concern about the slide in the rupiah, which has fallen around 15 percent this year. Slumping commodity exports have led to a current-account deficit and have dragged economic growth to its slowest pace since 2009, denting investor confidence in Southeast Asia'€™s largest economy.

The rupiah rose 0.2 percent on Wednesday to 14,651 per US dollar following the launch of the central bank'€™s new monetary regulations. The Indonesian currency dropped to 14,736 on Tuesday, its weakest level since July 1998.

BI deputy governor Perry Warjiyo said that BI hoped to deepen the foreign exchange market and increase FX supply by issuing the SBBI.

BI has also lowered the holding period for BI certificates (SBI) to one week from a previous period of one month. It claimed that the shorter period would be more attractive for foreign investors, and would thus help spur higher capital inflows into the country. '€œWe want to see them invest in monetary instruments in addition to bonds and stocks,'€ he said.

In terms of foreign exchange traffic, BI will ask FX owners to submit supporting documents that state the purpose of their FX transactions. '€œThe documents should reflect a valid need for the transactions,'€ Perry said. This requirement will be implemented in late October.

Commenting on the second policy package, CIMB Niaga economist Winang Budoyo said that the measures reflected the central bank'€™s commitment to be present in the market.

He applauded the time reduction in the SBI holding period, saying that it could help stimulate an increase in FX to address the supply and demand gap issue.

OCBC Bank economist Wellian Wiranto said that the measures had given BI more elbow room, even if its pledge to intervene in the forwards market '€œis not without risks'€.

'€œOverall, these measures should go some way in bringing in some much-needed liquidity in the forwards market and, by extension, provide some stability to the spot exchange rate market,'€ he wrote in a research note.

The focus on intervention in the forwards market appeared necessary given increased hedging demand and the entrenchment of forward-to-spot dynamics, according to Wellian.

'€œHowever, it is by no means a risk-free policy toolkit. For one, forward dollar liabilities come due one day and eventually have to be accounted for in the foreign exchange reserves, even if such interventions would not weigh on reserve numbers now,'€ he added.
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