Bank Indonesia to intervene in forwards market from October

[JAKARTA] Bank Indonesia said it will start intervening in the currency forwards market to help stabilize the rupiah, which has dropped 9 per cent this quarter.

The central bank will start doing so from next month, Juda Agung, executive director of monetary policy, said at a media briefing in Jakarta on Wednesday. The authority is already active in the spot market to smooth volatility and said on Tuesday it saw the currency's fundamental value at 13,300 to 13,700 a dollar, compared with the current spot rate of 14,651. Bank Indonesia also plans to offer foreign-exchange bills before the end of October to help boost the supply of dollars locally, said Agung.

"One of the factors driving the rupiah's weakness is the gap between supply and demand in the spot and forwards markets," central bank Deputy Governor Perry Warjiyo said at the same briefing. Bank Indonesia has decided to start intervening in the forwards as the contracts signal expectations for moves in the exchange rate, he said.

The Indonesian currency has dropped the most in Asia after Malaysia's ringgit this quarter, increasing costs for local companies to service foreign-currency debt and making it harder to rein in inflation. Southeast Asia's economy is growing at the slowest pace since 2009 as the government struggles to meet its spending targets.

With the increasing demand for hedging in the foreign- exchange market, Bank Indonesia sees the need to focus more on intervention in the forwards to better signal its policy stance, Reza Siregar, an analyst at Goldman Sachs Group Inc in Singapore, wrote in a research note dated Sept 29. The rupiah's three-month implied yield, a gauge for the pricing of forwards that are used to hedge exchange-rate losses, rose to a two-year high of 19.7 per cent on Tuesday and was 16.1 per cent as of 3:36 pm in Jakarta.

One-month non-deliverable forwards on the rupiah gained 0.7 percent to 14,845 a dollar, according to data compiled by Bloomberg. In the spot market, the rupiah strengthened 0.2 per cent from Tuesday, prices from local banks show.

Bank Indonesia optimized market operations using reverse- repurchase agreements, central bank bills and certificates of deposits in August, Agung said. That's reduced excess short-term liquidity, making it more costly to borrow the rupiah in the short-term to buy dollars, he said.

BLOOMBERG