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Indonesia relaxes reserve requirement rules to stabilise market

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Indonesia's central bank loosened regulations on reserve requirements on Friday to allow banks some flexibility to better manage liquidity, a step aimed at reducing volatility in the overnight money market.

[JAKARTA] Indonesia's central bank loosened regulations on reserve requirements on Friday to allow banks some flexibility to better manage liquidity, a step aimed at reducing volatility in the overnight money market.

From July, banks must keep a minimum 5 per cent of their total deposits at Bank Indonesia (BI) everyday and maintain at least a 6.5 per cent average of total deposits in the period of two weeks. Banks would get an interest of 2.5 per cent from BI.

Under existing rules, banks must park at least 6.5 per cent of deposits at the central bank every day.

Dody Budi Waluyo, executive director of economic and monetary policy, told a news conference earlier this week the new regime gives banks 1.5 percentage points of flexibility in managing day-to-day reserve requirements. His remarks were embargoed until the announcement. "There's a large surplus of liquidity in the system right now, but the distribution is not equal among banks and ... smaller banks don't always have access to borrow from bigger banks in the money market," Mr Waluyo said, adding that the policy is aimed at tackling such a problem.

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Mr Waluyo said the new rules mean banks will not need to resort to the overnight money market to meet their daily reserve requirements if they miscalculate their daily deposit needs. This should help make the market less volatile, he said.

A bank with an abundant amount of cash can also opt to invest in a better-yielding instrument rather than park it at the central bank, which would be more profitable, Mr Waluyo added.

The measure was already announced at the central bank's annual dinner with bankers last year and received a positive response.

On Thursday, Kartika Wirjoatmodjo, chairman of Indonesian Banks Association and the chief executive of the biggest bank by asset Bank Mandiri, said the relaxation of reserve requirement rules would make banks' liquidity management more optimal.

BI kept its benchmark rate unchanged for the sixth straight meeting last week, saying its policy stance was leaning toward neutral.

Mr Walujo reiterated on Friday that the latest measure was not a change of policy stance, but that the central bank was"complying with common practice in many central banks." Last year, its policy was more pro-growth, when it slashed the benchmark rate six times by 150 basis points and made several cuts to banks' reserve requirement ratio.

REUTERS

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