Bank Indonesia likely to accumulate reserves if persistent pressure remains on rupiah to appreciate further

Bank Indonesia is expected to discuss the rupiah during its policy meeting today. The rupiah has boosted with the help of a turn in market sentiment since the start of 2016. Furthermore, the central bank had used the momentum to cut its interest rate to boost GDP growth. Along with a soft inflation outlook, there is possibly room for further cuts going forward. Meanwhile, however, it is likely that the authorities have been keeping a close watch on rupiah’s appreciation. The authorities are watchful of possible volatility ahead amidst uncertainties regarding the US Fed rate trajectory.

The central bank does not wish to see the rupiah weaken just as fast as it had appreciated thus far in the year amidst another bout of global risk aversion. Risks of external financing remain. Even though the current account deficit dropped to 2% of the GDP in 2015, net foreign direct investment also fell 1% of GDP. Foreign reserves to short-term external debt ratio continue to be amongst the lowest in the region. On this front, the central bank is expected to accumulate reserves if there is continuous pressure on the currency to appreciate further.