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Bank Indonesia move may mean the end of toilet breaks

Sunday, 28 Jul 2013 | 8:12 PM ET
Sha Ying | CNBC

Indonesian currency traders are hoping they will need to take fewer toilet breaks, now that the central bank has started to relax its tight grip on the rupiah. Bank Indonesia (BI) went to such extraordinary lengths in recent months to curb speculative selling of the rupiah that traders say it sent officials into trading rooms, forcing them to retreat to rest rooms to swap market gossip, often via smartphone apps.

"The (toilet) cubicle is the only place we can discuss market rumors anymore and WhatsApp has become the only way we can do it without getting into trouble with Bank Indonesia. Those guys are all over us," one trader at a local bank said of the environment before the central bank started to ease its control of the market.

The impromptu visits by central bank employees were part of an effective if unorthodox ploy to keep the rupiah stronger than 10,000 per dollar, and it shut down all but the most essential deals. Traders said the officials would often turn up at their dealing rooms when the rupiah was under pressure.

(Read more: An Asian economy's huge move to lure capital back)

"They began with the usual phone calls that got more and more frequent telling us not to buy dollars and they said we were unpatriotic if we did so," said another trader.

"Then BI put staff on trading floors to put more pressure on us and make it hard even to talk, let alone buying dollars. We're all terrified of BI - of talking to them or about them. We work on silent trading floors."

Indonesia Rate Hikes Will Bring Back Inflows: Official
Perry Warjiyo, Deputy Governor of Bank Indonesia says he is confident the aggressive interest rate hikes of the past two months will help bring back capital inflows and support the rupiah.

Bank Indonesia said it did not have a program of sending staff to dealing rooms to stymie selling of the rupiah.

"As far as I know, there is no such thing by the central bank because we have an online system to monitor them," a BI spokesperson said.

(Read more: We're ready for exit of QE flows: Indonesia official)

BI seemed to signal a shift in its position last week when it allowed the rupiah's indicative rates to match dealt rates, effectively permitting it to drop to a four-year lows past 10,250 against the dollar.

The central bank had been selling between $100 million to $150 million a day at levels well below dealt rates to keep the rupiah stronger than 10,000 per dollar.

It also created an onshore reference rate to take the sting out of the more volatile and liquid offshore market, banned local banks from participating in the non-deliverable forwards (NDF) market in Singapore, and raised interest rates twice.

"They took pressure off the rupiah by killing the market," was how another trader put it. "This is a central bank scarred by the currency's collapse during the (1997/98) Asian crisis and willing to pay any price to avoid a repeat of that, even if no one else seriously thinks that's going to happen."

(Read more: Rate hike a pre-emptive strike: Indonesia official)

This shift suggests that Bank Indonesia is no longer as concerned about capital outflows suddenly weakening the rupiah, even as the market debates when the U.S. Federal Reserve is likely to start winding back its bond-buying program.

Still, for now, most of its restrictions remain in place.

"Hopefully having actual rates is the first step towards a more normal market and they'll ease some of their other measures too. No sign of it yet, though," said a dealer at an Indonesian bank.

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