Indonesia to Sell Dollar Term Deposits as Rupiah Falls

Bank Indonesia said it will start offering dollar term deposits in two weeks to boost supply of the currency locally and stabilize the rupiah, which dropped to its weakest level in more than two years today.

The move is part of efforts to deepen Indonesia’s financial market, Governor Darmin Nasution said in a briefing in Jakarta today. The 7-day, 14-day and 1-month term deposits will be marketed at weekly auctions, depending on market conditions, the central bank said.

“This move will help BI to increase dollar reserves and it will have more ammunition to intervene in the market,” said Lana Soelistianingsih, an economist at PT Samuel Sekuritas Indonesia in Jakarta. “It will help to smooth out rupiah volatility.”

Indonesia joins India in moving to steady its exchange rate as the escalating European crisis spurs outflows from emerging markets, with the rupiah falling the most after the rupee this year in a basket of 11 Asian currencies tracked by Bloomberg. The measure will provide an avenue for local lenders to bring back an estimated $2 billion a day on average that is currently being kept in overseas banks, Bank Indonesia Deputy Governor Halim Alamsyah said.

Provide ‘Incentive’

“The Indonesian rupiah has weakened sharply recently due to illiquidity in the onshore foreign exchange market and deteriorating external balances,” Edward Lee, Singapore-based regional head of rates strategy at Standard Chartered Plc, said in a note. “We believe BI’s action will provide an incentive for banks to place their offshore dollar liquidity onshore. However, it is unclear how this will improve the liquidity situation in the onshore market.”

The central bank said it will offer a “competitive rate” for the dollar term deposits. Most of the excess foreign-currency funds held by local lenders are held in banks abroad, and Bank Indonesia aims to be an intermediary for these banks, it said.

The move will “complement” foreign-exchange reserves and make it easier for the central bank to enter the market, Bank Indonesia said.

The rupiah fell 1.3 percent to 9,606 per dollar as of 4:38 p.m. in Jakarta, the weakest level since November 2009, according to prices from local banks compiled by Bloomberg. The currency has lost almost 6 percent this year.

“BI’s timing to sell dollar term deposits is a bit late considering the current situation of the rupiah,” Soelistianingsih said. “This confirms that BI urgently needs dollars.”

India’s central bank has also stepped up the fight to steady the rupee this month. It curbed trading in currency derivatives to rein in volatility and moved to boost the supply of dollars by cutting the amount of overseas income companies can hold in foreign currency to 50 percent from 100 percent. Governor Duvvuri Subbarao said last week policy makers will take steps as needed to curb swings in the rupee.

(Central bank corrects statement cited in fourth paragraph to remove reference to funds being derived solely from export revenue, in story first published on May 29.)
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