Rupiah likely to stay stable even if rate cut

Urip Hudiono, The Jakarta Post, Jakarta

The country's high-yielding capital markets and strong foreign exchange reserves should help the rupiah withstand the central bank's expected cutting of its key interest rate this week, analysts say.

They note Bank Indonesia (BI) assured it would be cautious in carrying out the cuts by taking into account local and global economic developments.

"A rate cut will of course affect the rupiah, but to say it will drag the rupiah to the brink of collapsing is a bit of an overreaction," analyst Farial Anwar of the Currency Management Group told The Jakarta Post.

"It may well be a ploy from speculative investors who see a rate cut will spoil their high returns, and are now trying to influence the market and policy makers against such a direction."

Farial believes the current 8 percent difference between the rates of BI and the U.S. Federal Reserve will keep investors interested in the recent bullish trading of Indonesian bonds and shares.

"Even if the BI rate is cut, where will the investors go to?" he asked. "The trend in the flow of global capital market funds now is still from the U.S. and Europe to emerging Asian markets, and there is no place more attractive now than Indonesia."

The rupiah ended slightly higher to Rp 8,785 against the U.S. dollar on Friday, from Thursday's Rp 8,796, as bearish sentiments continued hawking the American greenback worldwide.

The rupiah has gained nearly 12 percent so far this year, becoming the world's best performing currency as investors rush to purchase rupiah-based assets.

The draw is the enticing BI rate, still at 12.75 percent compared to the Fed's 4.75 percent.

BI Governor Burhanuddin Abdullah hinted the central bank may begin cutting rates in its next monthly policy meeting on May 9 amid easing inflation.

Deputy Governor Hartadi A. Sarwono mentioned the cut may be as much as a quarter percentage point, but BI will remain cautious on recently soaring oil prices and still tight global monetary policies.

The Fed is expected to continue hiking rates, a drive which began in June 2004, to 5 percent during its policy meeting on May 10.

The rupiah has jittered from the expectations, although Indonesian bond prices, which move inversely to their yields, rose as investors sought prospective long-term bonds. Shares also remained bullish with cheaper bank lending on easing rates supporting growth.

Analysts contend the rupiah has historically remained stable on a rate difference between 4 and 5 percent, and an effective rate between 1 and 2 percent.

Farial said the rupiah also had withstood shocks on minimum forex revenues of between $30 to 33 billion, which proved enough to counter any speculative market trading. Indonesia's reserves currently amount to $43 billion, although the recent rise mostly came from the portfolio investments rather than export revenues.

"So what is important now is that BI carries out the rate cuts in a measured manner to help growth while avoiding causing too much of a shock to the markets," he said.

"The government, meanwhile, being mostly responsible for last year's inflation surge from fuel price hikes, has to work hard to fundamentally support the rupiah through improved investments and exports."
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