Satria Sambijantoro, Jakarta – Bank Indonesia (BI) has finally relented to intense pressure on the rupiah by allowing it to trade above the psychological threshold of 10,000 per US dollar for the first time in four years.
The rupiah weakened on Monday by 44 basis points to hit 10,024 per dollar, according to the Jakarta Interbank Spot Dollar Rate (JISDOR) – a rupiah reference rate that the central bank makes based on prices from local banks – after weeks of strong interventions from the bank.
Deputy Governor Perry Warjiyo said the rupiah at 10,024 per dollar reflected its market value and the fundamental rate based on Indonesia's macroeconomic indicators.
"With the level of rupiah and government bonds yield at the moment, you cannot ask for a better price. Besides, going forward the BI rate has the possibility of going down – not going up – if inflation returns to normal in September," Perry said on Monday in a text message.
The rupiah's fall on Monday was the steepest in a day since the JISDOR was introduced by the central bank on May 20, and was the first time the rupiah rate onshore was quoted at a five-digit level since September 2009.
The central bank had been trying to maintain the rupiah above the psychological threshold at the expense of its foreign exchange (forex) reserves that had depleted by a staggering $7 billion in June to touch $98.1 billion, the lowest level since February 2011.
"It looks like Bank Indonesia is finally acknowledging it does not make sense to hold the rupiah below 10,000, given the eroding effect it has on its reserves," Khoon Goh, a senior currency strategist with ANZ Bank in Singapore, said via email on Monday.
BI is seen as reluctant to prevent the rupiah from breaching the 10,000 barrier, opting to intervene heavily in the market to shield the rupiah, which has faced intense pressure from huge capital outflows in Southeast Asia.
In 2013, the rupiah posted the smallest decline against the dollar among the ASEAN currencies based on onshore spot rates, according to data from ANZ Bank. The rupiah's 2.1 percent fall was relatively low, compared to the Malaysian ringgit (4.5 percent) or the Philippines peso (6 percent), Goh noted.
"Intervening for smooth currency moves is one thing. Steadfastly defending a level in the currency is incompatible with macroeconomic fundamentals and is not the best use of foreign exchange reserves," he said.
However, the rupiah could still strengthen in the coming quarters, thanks to the likely improvement in exports and the implementation of the fuel price hike, both of which will help narrow Indonesia's current account deficit, according to Suriyanto Chang, the head of the treasury with Bank QNB Kesawan.
Concerns that the US central bank would taper its stimulus had emanated way too early, with the dollar expected to remain on a bearish trend going forward, he said.
Suriyanto also believed that concerns over the weakening rupiah and depleting forex reserves were overstretched.
"Back in 2008, we already experienced the moment when our rupiah was hovering at 12,000 per dollar while our forex reserves were only around $50 billion," he said on Monday. "The rupiah, however, managed to strengthen at that time."
This year, BI became the first Asian central bank to hike interest rates in response to the weakening rupiah, as well as the likely spike in inflation stemming from the fuel price hike.
Newly appointed BI Governor Agus Martowardojo jacked up the BI rate by a consecutive 75 basis points in his first two monetary meetings since he took office in May.