Rupiah Forwards Advance as Central Bank Seen Tackling Inflation

Indonesia’s rupiah forwards rose for a second day on speculation the central bank will take steps to rein in inflation after it accelerated to a 20-month high in February. Government bonds advanced.

DBS Group Holdings Ltd. and PT Mandiri Sekuritas said in research notes they expect Bank Indonesia to raise its deposit facility rate, or Fasbi, in 2013 after consumer prices gained 5.31 percent last month from a year earlier. That compares with the monetary authority’s 3.5 percent to 5.5 percent target range.

“Pressure for Bank Indonesia to act is starting to rise,” said Eugene Leow, an economist at DBS in Singapore. “Inflation is already near the upper end of its target range, so once it breaches the upper limit, we expect the central bank to move to hike rates.”

The rupiah’s one-month non-deliverable forwards gained 0.1 percent to 9,716 per dollar as of 3:26 p.m. in Jakarta, data compiled by Bloomberg show. They traded at a 0.3 percent discount to the spot rate, which rose 0.1 percent to 9,688, prices from local banks show. A daily fixing used to settle rupiah derivatives was set at 9,688 today, from 9,709 yesterday by the Association of Banks in Singapore.

Bank Indonesia will hold the benchmark interest rate at 5.75 percent tomorrow, according to all 21 economists surveyed by Bloomberg.

One-month implied volatility in the rupiah, which measures expected moves in the exchange rate used to price options, increased two basis points, or 0.02 percentage point, to 5.9 percent.

Auction Fails

The finance ministry failed to meet its target at an Islamic bond auction for the second time in a row yesterday, selling 760 billion rupiah ($78 million) of sukuk, short of its 1.5 trillion rupiah goal, spokesman Eri Hariyanto said.

The yield on the government’s 5.625 percent notes due May 2023 dropped one basis point to 5.35 percent, prices from the Inter Dealer Market Association show.

The premium investors demand to hold the longer-dated securities will probably widen to as much as 175 basis points as investors prefer shorter tenors on concern inflation will accelerate, DBS analysts led by David Carbon in Singapore, wrote in a note today.

Before it's here, it's on the Bloomberg Terminal.