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NEWS UPDATES Asean Affairs   30 November 2010

Bank Indonesia may rein in hot money

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In a bid to rein in hot money that threatens to unbalance the economy, Bank Indonesia is studying whether to impose a higher dollar reserve requirement on lenders, a central banker said.

The policy would compel banks to increase their dollar reserves to as much as 3 percent to soak up excess liquidity from a surge of foreign funds.

"In 2008, the central bank cut foreign exchange reserves statutory to 1 percent from 3 percent in order to pump foreign exchange liquidity into the market," said Hartadi A. Sarwono, a BI deputy governor.

"We plan to bring it back to the level before 2008, perhaps not 3 percent but close to that," he said, declining to specify a time frame for the policy's implementation.

Starting on Nov. 1, BI required lenders to set aside 8 percent of their rupiah deposits as reserves, up from 5 percent.

The central bank also said it would introduce an additional reserve requirement in March that would penalize banks with loan-to-deposit ratios below 78 percent or above 100 percent.

BI has been wrestling with the surge in foreign funds as near-zero interest rates in the West and Japan have promoted investors to seek higher yields in emerging economies such as Indonesia.

Although foreign funds support growth, they drive up prices and have the potential to create asset bubbles that could burst, leading to a flight of capital.

"So much money chasing the same amount of goods will increase inflation," Hartadi said. "The dilemma is if we increase the [benchmark interest] rate, it will increase inflows here. So we see an option to manage it by raising statutory reserves."

The central bank has kept its benchmark interest rate at a record-low 6.5 percent since August last year to support growth.

The rate is one of the highest in Southeast Asia, making Indonesia into a key investment destination.

Chatib Basri, an economist from the University of Indonesia, welcomed the central bank's moves, saying it was unlikely to increase the key rate in the short term since it would attract more hot money to the country.

Indonesia posted a surplus of $7 billion in the three months that ended in September, compared with $5.4 billion in the second quarter, according to central bank data.

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