Bank Indonesia debuts operation twist to lure funds, guard rupiah

Bloomberg

Bank Indonesia is undertaking its own version of Operation Twist, selling short-term notes and buying up longer ones, which it says will shore up the rupiah by bringing in foreign inflows.
Indonesia’s central bank will sell off shorter-tenor government bonds to boost their yield differential over US rates and attract foreign inflows that would help underpin the currency, Governor Perry Warjiyo said in an investor call after delivering a surprise interest-rate hike.
“We’ve been doing this so far and the result has been quite positive,” Warjiyo said. “We’ve seen yield differential getting more attractive, inflows starting to return and supporting our exchange rate in the past month.”
At the same time, the bank will buy up long-term debt papers to flatten the yield curve and lower borrowing costs for the government. The pace and magnitude of the operation will depend on market conditions, he said.
Yields on Indonesia’s five-year government bond climbed 5.2 basis points, while those on the 10-year paper fell 9.1 basis points. The rupiah weakened 0.7% to 14,848 to the dollar.
Operation Twist would build on a similar exercise by Bank Indonesia to start selling off short-dated securities in July, part of its move to begin unwinding purchases over the last two years to help the government fund pandemic stimulus. Warjiyo said the bank has sold off 17.4 trillion rupiah ($1.2 billion) so far.
“The big unknown is the quantum and pace of BI’s bond sale,” Australia & New Zealand Banking Group economist Krystal Tan and strategist Jennifer Kusuma said. They estimate that BI has about 600 trillion rupiah of bonds due in less than five years, or half of their total holdings, with about 410 trillion rupiah being low-coupon debt bought under the burden sharing program.
Bank Indonesia may have to step up its interventions through Operation Twist as a more hawkish Federal Reserve could heap pressure on the currency, according to Reny Eka Putri, a quantitative analyst at PT Bank Mandiri Tbk. The rupiah may need to be kept around its current level of 14,700 to 15,000 rupiah in order to temper rising inflation, she said.
The central bank said the operation has shown early success as foreign funds started pouring into government bonds, with $1.4 billion inflows seen so far this month. Global investors have pulled money out of the notes for the previous five months.