Indonesia central bank steps up FX swap auctions to support liquidity

JAKARTA (Reuters) – Indonesia’s central bank 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 bank official told Reuters on Monday.

Bank Indonesia (BI) raised its key rate , the 7-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 BI 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 the Muslim fasting month of Ramadan and the Eid al-Fitr 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 7-day reverse repo rate was hiked 25 basis points, we must maintain enough rupiah liquidity in the money market,” Nanang Hendarsah, BI’s head of monetary management said. “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 BI’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”.

BI’s currency intervention has caused rupiah liquidity to tighten. While its sovereign bond buying operations could sterilize this effect, Asmoro said the central bank has been less active with these operations.

Late last month, governor Agus Martowardojo announced that BI 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 U.S. Treasury yields rose and the dollar rallied. The currency continued to fall despite BI’s rate hike and on Monday it softened further to trade at 14,195 to the dollar, its weakest since October 2015.

Under the BI’s auctions, the central bank swaps rupiah funds with commercial banks’ foreign currency holdings for a period of time, which allows the banking system access to extra liquidity.

Hendarsah said that BI will review whether to conduct two or three FX swap auctions each week depending on market condition.

So far this month, BI has sold swap contracts worth nearly $2.7 billion, mostly with one-month and three-month tenors.

Prior to this, BI 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.

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