Rupiah bounces back on rising FX reserves

The rupiah ended its six-day losing streak on Thursday partly due to positive sentiment from the latest improvement in the foreign exchange (forex) reserves, which is expected to boost Bank Indonesia’s (BI) ability to defend the currency.

The rupiah surged 25 basis points to trade at 11,389 per US dollar on Thursday, the first strengthening in a week after the currency slid for six consecutive days, according to prices from local banks compiled in the Jakarta Interbank Spot Dollar Rate (JISDOR).

The currency advanced following news that BI’s forex reserves rose by US$1.3 billion to top $97 billion by the end of last month, the highest level since June. The amount of the reserves is able to finance 5.2 months of imports and debt payments. 

“In Indonesia’s case, building up forex reserves is both prudent and welcomed [by the market],” Mirza Baig, the head of foreign exchange strategy with BNP Paribas in Singapore, said via email on Thursday.

“True, it limits the scope for appreciation of the rupiah in the near-term, but it should give the central bank the ability to make it less volatile in the long-term,” he explained.

BI’s forex reserves have increased for three consecutive months as the central bank took advantage of the recent capital inflow trend to pile up its dollar reserves. 

In October, the rupiah enjoyed its best monthly performance in four years as it strengthened by 3.1 percent, according to BI data, as better-than-forecast inflation and trade data released during the month drew robust inflows of foreign funds into the country. 

Foreign ownership in Indonesia’s government bonds increased by an impressive Rp 23.9 trillion ($2.1 billion) throughout last month to reach Rp 318.1 trillion as of Oct. 31, raising total overseas holdings in the local bonds market to 32 percent, according to data from the Finance Ministry’s debt management office.

The rupiah, which has underperformed for many months, had become undervalued, analysts said. The Indonesian currency, which has dropped about 14 percent this year, is Asia’s worst-performing currency.

“Many people still expect the rupiah to depreciate, though we feel that given how much it has already fallen, the scope for further weakness is limited within the next one year,” said Baig from BNP Paribas.

Robust foreign inflow in October was also attributed to the possibility that the US Federal Reserve would not taper its quantitative easing policy in the near future, a sentiment that reversed portfolio funds back to emerging economies. 

With Indonesia expected to be flushed by vast amounts of liquidity going forward, analysts have said that BI would continue absorbing dollars in the market to build a stronger forex reserves cushion, in preparation for a more volatile global financial market next year. 

BI Governor Agus Martowardojo has already hinted at his commitment to undertaking such a strategy. Last month, he stated that the central bank’s focus going forward would be preserving the forex reserve level so that it remained in line with its emerging market peers. 

“Foreign reserves are likely to climb steadily higher for the rest of this year,” Chua Hak Bin, an ASEAN economist with Bank of America Merrill Lynch, said on Thursday. 

“We are expecting the Fed to begin tapering in the first quarter of next year — capital flows will probably be sustained for the rest of this year,” Chua noted.

Reports on the increase in the central bank’s foreign exchange reserves also boosted buying sentiment on the local stock exchange.

The Jakarta Composite Index (JCI) gained 0.8 percent to end the day at 4,486.11, the highest close since Oct. 31.

Prices of bluechip shares, including Bank Rakyat Indoensia and Astra International, closed higher in active trading.
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