Indonesia's central bank expects the rupiah to continue to strengthen and currency volatility to subside as markets price in anticipated hikes in US interest rates by the Federal Reserve, a senior official said on Wednesday. On March 1, after the rupiah hit a two-year low of 13,800 to the dollar, Bank Indonesia (BI) said it intervened in the market. Since then, the currency has appreciated, and it was trading around 13,730 per dollar early on Wednesday.
Doddy Zulverdi, head of BI's monetary management department, said the current level "is not the (rupiah's) fundamental and it should be stronger than now". Zulverdi, one of the candidates to become a member of BI's board of governors, reiterated the central bank's commitment to intervene in the market to reduce any volatility.
At its February policy meeting, BI said it anticipated four rate hikes by the Fed this year. On March 9, Governor Agus Martowardojo said the market is now more confident there would be only three hikes. On Tuesday, Martowardojo said the central bank's monetary stance remains neutral despite recent rupiah weakness. Its next policy decision is due on March 22, hours after the Fed concludes a meeting.
Indonesia's foreign exchange reserves fell $3.9 billion in February, mainly due to BI's intervention to support the rupiah and government debts in foreign currencies. At the end of February, reserves stood at $128.1 billion, equivalent to 8.1 months of imports. Zulverdi said rupiah weakness has had a limited impact on exports, but has likely had a bigger effect on delaying imports.
Xavier Jean, an analyst with Standard & Poor's Global Ratings, said on Tuesday a rupiah exchange rate of 15,000 a dollar is "the psychological level" at which even companies without cashflow problems would take the decision to enter into proactive restructuring with creditors. "At 13,800, clearly debt is going up for companies that are not hedged, but we don't see that level today as a major problem because in 2015 they have been through that," Jean told reporters.
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