JAKARTA (TheInsiderStories) – Bank Indonesia (BI) will conduct three cross foreign exchange swap auctions this week, to maintain the availability of rupiah liquidity and stabilizing interest rates on the financial market.
It is been four days after BI raised its benchmark interest rate, but rupiah has not shown any signs of strengthening. Rupiah continued to weaken against U.S Dollar to Rp14,200 yesterday. According to the Jakarta Interbank Spot Dollar Rate (JISDOR), rupiah weakened to Rp14,176 on May 21, down 0.48 per cent from May 18. This level is the weakest since October 2015.
The rupiah weakening comes as foreign capital shift their portfolio to U.S treasuries. The 10-year U.S Treasuries return reaches above 3 percent since last week.
The U.S dollar index was recorded at its highest level since November 2017. Since the beginning of the year to date, foreign investors (investors) have been selling of Rp40,98 trillion in domestic stocks.
Previously, BI made two swap auctions in the last two weeks, and once a week throughout April. The average Jakarta Interbank Offered Rate overnight rate rose to 4.22528 percent, from 4.02500 percent.
Analysts said the increase in frequency could be a pre-emptive step to provide rupiah liquidity for banks before customers start taking cash for much. Public spending during Ramadan fasting month and Ied Fitr celebrations usually increases sharply compared to the usual months.
“Although the 7 day reverse repo rate is up 25 basis points, we must maintain the adequacy of rupiah liquidity in the money market,” said Nanang Hendarsah, head of monetary management at BI as quoted by Reuters.
Bank Mandiri economist Andry Asmoro believes the move may be part of BI’s policy mix. Central Bank, “wants to tighten to dampen volatility in the market, but on the other hand also wants domestic liquidity to be more stable,” he said.
BI’s intervention to curb dollar exchange rate has caused the rupiah liquidity to be tight. Although government bond purchases can sterilize this effect, according to Asmoro, the central bank has reduced its operating activities.
Through the auction mechanism, BI will exchange rupiah funds with the ownership of commercial foreign currency for a certain period of time, thus allowing access to the banking system to obtain additional liquidity.
Hendarsah said BI would consider whether to conduct two or three foreign currency swap auctions each week, taking into account market conditions. Throughout this month, BI has sold swap contracts worth nearly US$2.7 billion, mostly for one month and three months.