Adrian Wail Akhlas, Jakarta – The rupiah exchange rate fell significantly on Wednesday as investors worry about the independence of Bank Indonesia (BI) following a proposed bill that would give the government the authority to intervene in monetary policymaking.
The rupiah depreciated by more than 1.5 percent to Rp 14,815 per United States dollar earlier on Wednesday, before rebounding to Rp 14,771 by 2:30 p.m. Jakarta time following reports on the central bank bill, which would revise Law No. 23/1999 on Bank Indonesia.
"The rupiah is the victim of a harsh bill that could curtail the central bank's independence," said Mirae Asset Sekuritas Indonesia economist Anthony Kevin on Wednesday, adding that the central bank's hard-earned prudent reputation was at stake.
The rupiah has depreciated by 6.38 percent since the beginning of the year, slowly reducing its loss from nearly 20 percent in March and April, when the coronavirus pandemic-induced volatility hit the country's financial market.
The central bank has intervened in the spot market to reduce volatility, according to BI head of monetary management Nanang Hendarsah, Reuters reported.
A panel of experts advising the House of Representatives recommended the bill, which obliges the central bank to greater efforts in boosting economic growth, supporting employment and supervising banks.
The bill will revise regulations underpinning the central bank's independence by involving the government in monetary policymaking by allowing the finance minister or other economic ministers to attend monetary policy meetings and cast votes.
According to the draft, the government and the central bank should establish a "monetary council" that includes members of the Financial System Stability Committee (KSSK) to lead and direct monetary policy and operations.
"Since the central bank implemented its inflation-targeting policy in 2006, inflation has remained generally low and supports economic growth, because there is stability," Anthony went on to say. "This is now being threatened as investors are worried BI will no longer be prudent."
Although the inclusion of additional stakeholders is not unusual and could support consensus-based policy decisions and add a layer of oversight, the proposed amendment is a departure from the normal construct of monetary practice, said Moody's Investors Service vice president Anushka Shah.
"However, the dominant role proposed for representatives of the Ministry of Finance poses the risk that the central bank's independence will be compromised and that it will no longer be completely insulated from political interference," she told The Jakarta Post, adding that the rating agency would monitor how the central bank would prioritize its new mandates if "conflicts between these multiple objectives arise."
"We will consider all of these factors in our overall assessment of institutional strength," she added.