Foreign Exchange (FX) Reserves down, Indonesian rupiah volatility eases

The reduction in international reserve eased during March 2013, just as expected.
It fell slightly by USD 0.4 billion to USD 104.8 billion in March 2013 as the central bank may have scaled down its foreign exchange intervention. It was softer than the reserve reduction in Feb13 which reached US$3.6bn.

Lower intervention: wider toleration of Rupiah depreciation due to fundamental factors.
Trade deficit and inflation risks have caused fundamental correction on the rupiah. Net foreign outflow was recorded in the bond market, reaching Rp3.3tn in Mar13. On average, the rupiah depreciated by 0.23% and surpassed the Rp9,700/US$ level during last month.  
Yet the volatility of it is still in check.

The central bank was intervening in the market to smoothen the depreciation degree. Rupiah volatility was in a downward trend, shown from its volatility index which fell from 15.5 in February 2013 to 15.0 in March 2013.

Episodes of Rupiah weakening pressure: “to be continued”.

It will be difficult for the exchange rate to appreciate below Rp. 9,700/US$. Although food inflation is expected to level off in the next following months, concern of a pass through effect from administered prices to headline inflation remains very much alive. Moreover, rising oil product imports due to increasing subsidized fuel consumption combined with fragile global condition has also reminded the market on the external imbalance risk. The exchange rate expected to hover around Rp. 9,700/US$ to Rp. 9,900/US$.

Policy implication: FX intervention continued and FASBI rate hike remains on the table.
Against the above background, we think Bank Indonesia (BI) will continue to be in the market, albeit of lesser magnitude, to maintain rupiah volatility. We also think FASBI rate hike will be done this year at least 25bps to 4% in order to support the currency. Nevertheless, as we expect the central bank will not do anything significant about changing its stance until the next governor is officially appointed, we suspect FASBI rate will be hiked the soonest in June 2013.

We do not expect significant deterioration in Foreign Exchange reserves. Considering the reserve decline is expected to tone down ahead to tolerate further currency weakening and the central bank continues to upgrade its foreign exchange through term deposit, we hardly see that the reserve will be below the US$ 100 billion. Since the beginning of 2013, BI’s FX reserves portion from the USD term deposit continued to charge up to USD 3 billion in March 2013 from USD 2.2 billion in February 2013. Accordingly, excluding the term deposit Foreign Exchange reserves currently stand at USD 101.8 billion in March 2013.