Indonesia Central Bank Steps Up FX Swap Auctions to Support Liquidity
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Bank Indonesia will conduct three foreign-exchange swap auctions this week to ensure there is enough rupiah liquidity in the market following its benchmark interest rate hike, a senior official at the central bank said on Monday.
Bank Indonesia raised its key rate, the seven-day reverse repo rate, by 25 basis points to 4.50 percent on Thursday last week to bolster the rupiah and stem capital outflows.
The three Bank Indonesia swap auctions this week are more than the two conducted last week and the one conducted each week in April. Analysts say the increase in frequency could be a pre-emptive move to provide rupiah liquidity to banks before customers start taking cash for spending related to Ramadan and the Idul Fitri celebration.
The overnight contract for the Jakarta Interbank Offered Rate (Jibor) rose to 4.22528 percent on average the following day, from 4.02500 percent.
“Even though the seven-day reverse repo rate was hiked 25 basis points, we must maintain enough rupiah liquidity in the money market,” said Nanang Hendarsah, head of monetary management at Bank Indonesia. “With more FX swaps, there will be more rupiah liquidity.”
Andry Asmoro, an economist at Bank Mandiri, said this measure is likely a part of the central bank’s policy mix where the central bank “wants to tighten to guard against volatility in the market, but on the other hand it also wants domestic liquidity to be stable.”
Bank Indonesia’s currency intervention has caused rupiah liquidity to tighten. While its sovereign bond buying operations could sterilize this effect, Andry said the central bank has been less active with these operations.
“The overnight contract for the Jakarta Interbank Offered Rate (Jibor) rose to 4.22528 percent on average the following day, from 4.02500 percent.”
Late last month, Bank Indonesia Governor Agus Martowardojo announced that the central bank would increase the auction frequency to twice a week from once a week, amid increasing open market intervention to shore up the rupiah.
The rupiah has been under pressure in past weeks as United States Treasury yields rose and the dollar rallied. The currency continued to fall despite Bank Indonesia’s rate hike and on Monday it softened further to trade at 14,195 to the dollar, its weakest since October 2015.
Under the auctions, the central bank swaps rupiah funds with commercial banks’ foreign-currency holdings for a period, which allows the banking system access to extra liquidity.
Nanang said Bank Indonesia will review whether to conduct two or three FX swap auctions each week, depending on market conditions.
So far this month, Bank Indonesia has sold swap contracts worth nearly $2.7 billion, mostly with one-month and three-month tenors.
Prior to this, the central bank had not sold any FX swap contracts this year, either because there were no bids in the auctions or because it had refused all bids, according to its website.
Questions & Answers
Q.Why is Bank Indonesia conducting more foreign-exchange swap auctions this week?
Why is Bank Indonesia conducting more foreign-exchange swap auctions this week?
Bank Indonesia is increasing the frequency of FX swap auctions to ensure sufficient rupiah liquidity in the market. This follows a benchmark interest rate hike and is a pre-emptive move before increased spending related to Ramadan and the Idul Fitri celebration.
Q.What effect has Bank Indonesia's currency intervention had on rupiah liquidity?
What effect has Bank Indonesia's currency intervention had on rupiah liquidity?
The central bank's currency intervention has caused rupiah liquidity to tighten. While sovereign bond buying operations could sterilize this effect, the central bank has been less active with these operations.
Q.How do these foreign-exchange swap auctions provide extra liquidity to the banking system?
How do these foreign-exchange swap auctions provide extra liquidity to the banking system?
Under the auctions, the central bank exchanges rupiah funds with commercial banks' foreign-currency holdings for a period. This process allows the banking system to gain access to additional liquidity.
Q.How much in foreign-exchange swap contracts has Bank Indonesia sold this month?
How much in foreign-exchange swap contracts has Bank Indonesia sold this month?
So far this month, Bank Indonesia has sold swap contracts worth nearly $2.7 billion. These contracts primarily have one-month and three-month tenors.