BANK Indonesia ordered the country's 120 commercial lenders on Thursday to place more funds at the central bank in a move that could help shore up the rupiah after interest rate hikes in the past few months failed to stem the currency's depreciation.
Difi A. Djohansyah, a spokesman for the central bank, said the move would be done in stages to prevent the banking system from being "overly burdened" by the regulator.
Economists welcomed the higher reserve requirement, which would help to take out excess rupiah from the market and curb its depreciation against the US dollar.
Difi said Bank Indonesia would issue a regulation requiring lenders to gradually raise their secondary reserve requirement to as much as four per cent of total third-party funds from 2.5 per cent now. Starting next month, the required ratio will rise to three per cent, then to 3.5 per cent in November and four per cent in December.
The secondary reserve, which serves as a liquidity buffer by allowing banks to get access to cash, is made up of a combination of government bonds and central bank debt papers (SBI). Third-party funds are the public's money placed in a bank's term deposit, demand deposit and savings.
"The aim is to curb excessive loan demand in Indonesia," Difi said in a phone interview.
When banks place more money in government bonds and SBI, it reduces their ability to disburse loans.
Difi said reserves had been used by the central bank as part of monetary instruments along with the benchmark interest rate.
Bank Indonesia has raised its policy rate by 1.5 percentage points to 7.25 per cent since June. The tighter monetary policy was aimed at fighting rising inflation and to make Indonesian assets more attractive to overseas investors as a means of curbing capital outflows, which have weakened the rupiah.
The rupiah has fallen more than 19 per cent against the dollar this year.
Difi did not comment on whether Bank Indonesia's latest move would help strengthen the rupiah.
Gundy Cahyadi, an economist at DBS Bank in Singapore, said the impact of such a move on the currency "is unlikely to be material, if any, but note this step alone goes beyond just market stabilisation".
At the same time, Bank Indonesia's move will help to slow down loan growth, prevent overheating of the economy and curb domestic demand in general, he said.
"It should be regarded more as a move to tighten monetary policy in the economy - curb domestic liquidity in the banking system," Gundy said.
Recent increases in interest rates would undermine borrowing, and that has been reflected in the central bank's own forecast. Bank Indonesia had cut its lending growth target to 18 per cent this year from its original 23 per cent goal.
Indonesia's economy is also coping with weaker exports as a result of slowing global demand and a widening current account deficit. The central bank has spent billions of dollars to support the rupiah, and even such intervention has failed to prop up the value of the rupiah against the greenback. Foreign reserves fell to US$92.9 billion (RM299.5 billion) at the end of August from US$112.8 billion at the end of December, after peaking at US$124.6 billion in August 2011.
"Given that Bank Indonesia has been intervening in the foreign exchange market, there is a need to balance this by absorbing excess (rupiah) liquidity in the domestic economy, and this is a prudent move by the central bank," Gundy said.
Total rupiah-denominated third-party funds in commercial lenders stood at 2,843 trillion rupiah (RM796 billion) as of the end of July, compared with total outstanding loans at 3,021 trillion rupiah, according to Bank Indonesia data.
A secondary reserve requirement of 2.5 per cent indicates that the liquidity buffer of domestic lenders would be at 71 trillion rupiah, and by December's four per cent rule that would increase to more than 100 trillion rupiah, according to calculations by the Jakarta Globe.