Bank Indonesia boards announcing BI 7 Days Reverse Repo Rate (Photo: Bank Indonesia)

​JAKARTA (TheInsiderStories) – ​Bank Indonesia (BI) is expected to take a crucial action in responding the sharp decline in rupiah currency against U.S dollar as it has passed the ‘physiological level’ in Rp14,000 per dollar last Monday.

As of Tuesday in Jakarta trading until 11:44 am western Indonesian time, the rupiah fell by 0.3 per cent to 14,040 per US dollar, after touching 14,047, the weakest since December 2015.

Indonesia’s economic growth during the first quarter this year was slower than predicted by economists, making it difficult for BI to increase interest rate to shield the currency. The central bank has stepped up buying sovereign bonds from the secondary market to stem a selloff and intervened in the foreign exchange reserves (forex) market to stabilize the rupiah, but without much success.

In Tuesday announcement, Indonesia forex reserves fell to US$124.9 billion from US$126 billion in April, as BI continued to intervene in the market to stabilize the rupiah against the increasingly stronger US dollar.

According to BI, the current level of reserves remains adequate to finance 7.7 months of imports or 7.4 months of imports and the government’s foreign debt payments. The level was well above the international adequacy standards of around three months of imports.

TheInsiderStories expects that in order to stabilize the financial market, BI will continue taking necessary measures by utilizing all of the tools at its disposal, which include raising interest rate. The bond market may be pricing in such an eventuality. The 10-year bond yield also rose by 12 basis points to 7.27 percent.

Currently, BI 7-Days Reverse Repo Rate stands at 4.25 per cent level, which has been unchanged since September last year.

We believe BI will make the best decision on adjusting its benchmark interest rate to stem the rupiah`s weakening.

Foreign investors have sold a net US$1.1 billion of sovereign bonds last month, on top of US$2.7 billion of stocks this year, data compiled by Bloomberg show. Foreign investors hold around 38.4 per cent of local-currency bonds.

Bank Indonesia governor Agus Martowardojo has said that he will ensure ample liquidity of currencies to ease volatility, after repeated intervention on the rupiah. The central bank has also stepped up buying of sovereign bonds from the secondary market.

Indonesia is not alone in contending with investors who have turned cold. Debt sales from countries such as Russia have been cancelled or postponed, while Argentina’s central bank has raised interest rates three times in a week to halt a currency slide.