Rupiah Declines Most in Three Weeks as Central Bank Holds Rate

The rupiah dropped the most in three weeks after Bank Indonesia kept its reference rate on hold and a report showed foreign-exchange reserves fell to the lowest level since 2010.

Ten-year government bond yields rose to a two-week high as policy makers left borrowing costs at 6.5 percent today, a decision predicted by 16 of 25 economists surveyed by Bloomberg. The move is negative for debt and the currency as the central bank will be perceived as being behind the curve on inflation, said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong. Reserves declined 5.5 percent to $92.7 billion in July, the least since October 2010, data showed yesterday.

“There is no strong reason to drive a rebound in the rupiah,” said Fahrudin Haris Prastowo, a fixed-income trader at PT Bank Rakyat Indonesia in Jakarta. “Interest rates aren’t the biggest issue, but falling reserves are a concern as that reduces Bank Indonesia’s ammunition to support the rupiah.”

The currency declined 0.6 percent to 10,350 per dollar as of 4:51 p.m. in Jakarta, the biggest loss since July 24, according to prices from local banks. It reached 10,353 earlier, the weakest level since June 2009, and lost 4.1 percent this quarter. The spot rate traded at a 2.2 percent premium to one-month non-deliverable forwards, which slid 1.1 percent to 10,584, data compiled by Bloomberg show.

A fixing by the Association of Banks in Singapore used to settle the derivative contracts was set at 10,319, compared with 10,321 yesterday. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 22 basis points, or 0.22 percentage point, to 11.11 percent, according to data compiled by Bloomberg.

Bonds Drop

The central bank will improve rules for lenders’ reserve requirements and issue three-month deposit certificates to manage rupiah liquidity, according to a statement today. Bank Indonesia will ensure currency stability and won’t keep the exchange rate at a certain level, Governor Agus Martowardojo said Aug. 12. Consumer prices gained 8.6 percent in July from a year earlier, the most since February 2009, official data show.

The yield on government bonds due May 2023 rose 12 basis points to 8.01 percent, the highest level since July 30, data from the Inter Dealer Market Association show.

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