JAKARTA (TheInsiderStories) – Bank Indonesia (BI) planned to take measures to lower the cost of foreign currency hedging via swap transaction, BI’s Head of Monetary Department Nanang Hendarsah said on Monday (18/08). The decision is followed President Joko Widodo’ instruction to bring more foreign currencies to the country.
Lower cost is expected to attract more parties to hedging transaction, which in turn will help to stabilize the Rupiah. The main plan is to lower the premium for swap transaction with BI, Hendarsah said.
“BI’s swap premium is expensive because initially we thought that interbank swap market will be the one that is most active,” He said at the central bank office.
Hendarsah added the lack of activity in interbank swap market has left no option but for BI to take initiative. He continued, one of the measures is lowering the minimum hedging transaction with BI to US$2 million from currently $10 million. Another plan is to set a ceiling on swap rate.
BI also planned to relax the document requirement on underlying assets in a swap transaction, added Hendarsah. The central bank accepts swap transaction for hedging purposes in US dollar, Euro, Japanese Yen and Chinese Renminbi. The window for swap transaction with BI is every working days between 1400 and 1600 local time.
“We will conduct a broader communication to the exporter or customers linked to hedging instruments,” said Hendarsah by adding BI will meet 20 banks, 90 CEOs, and 90 Vendor for this plan.
BI has conduct three cross foreign exchange swap auctions last May, to maintain the availability of rupiah liquidity and stabilizing interest rates on the financial market. Previously, BI made two swap auctions in the last two weeks, and once a week throughout April.
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.
Bank Mandiri economist Andry Asmoro believes the move may be part of BI’s policy mix. The 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.