Rupiah Pares Losses After Surprise Rate Increase; Bonds Slump

Indonesia’s rupiah pared losses, after touching the weakest level since September 2009, as the central bank unexpectedly raised its key interest rate for the first time since 2011. Two-year bonds fell.

The rupiah dropped 0.2 percent to 9,883 per dollar as of 5 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. It touched 9,925 earlier, the weakest level since Sept. 15, 2009. One-month non-deliverable forwards dropped 0.6 percent to 10,170 after sliding as much as 1.3 percent. The contracts traded at a 2.9 percent discount to the spot rate.

Policy makers increased the reference rate by a quarter of a percentage point to 6 percent, the central bank said in Jakarta. All 19 economists surveyed by Bloomberg News forecast no change. The deposit facility rate, known as the Fasbi, was raised by 25 basis points to 4.25 percent yesterday, in what Bank Indonesia said was a preemptive move to maintain monetary stability. The central bank is burning through reserves at the fastest pace in Asia to contain the rupiah’s plunge, data compiled by Bloomberg show.

“It is likely that Bank Indonesia is very concerned with the rupiah’s volatility and the extent to which they are utilizing reserves in its effort to stabilize the currency,” said Sacha Tihanyi, a foreign-exchange strategist at Bank of Nova Scotia in Hong Kong. “There will be a knee-jerk reaction in covering rupiah shorts. Fundamentally, the currency is still challenged.” Shorts are bets that prices of an asset will drop.

‘Subsidy Burden’

The rate-setting meeting was Governor Agus Martowardojo’s first since he took over from Darmin Nasution last month. He is contending with slowing growth, while inflation is poised to quicken as the government prepares to increase fuel prices.

Overseas investors withdrew $1.3 billion from local stocks this month on speculation the Federal Reserve will reduce asset purchases that have fueled fund flows to emerging markets. Indonesia has recorded six consecutive current-account deficits.

“Crucially, the government will have to demonstrate ability to rationalize the fuel-subsidy burden, amongst other reforms to rein in current-account and budget deficits,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. “The risk of the rupiah falling to 10,500 to 11,000 per dollar cannot be discounted,” should the dollar’s broader rally continue.

The Dollar Index, which measures the greenback against six major partners, has dropped 4.2 percent since May 22, the day Fed Chairman Ben S. Bernanke said bond buying could be reduced.

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, rose eight basis points, or 0.08 percentage point, to 13.71 percent.

The yield on the 9.5 percent bonds due June 2015 jumped 17 basis points to 5.94 percent, the highest since October 2011, according to the Inter-Dealer Market Association.

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