The central bank, Bank Indonesia (BI), recently announced its intention to stop issuing 1-month central bank paper (Sertifikat Bank Indonesia, or SBI) by June. BI also plans to extend the auctions to a monthly schedule from the current weekly schedule starting in June. In the transition period, BI will adjust its tenor of issuance so that the maturity of the SBI will fall due on the second week of each month, implying that the tenors of SBI issued between March and June will be adjusted to meet the new maturity schedule.
One-month SBI account for around half of BI’s operations, and their removal is expected to affect markets. There are two broad implications. First, foreign participation in the SBI market has been volatile and has led to fluctuations in the foreign exchange market. The removal of the 1-month SBI, where the bulk of short-term foreign capital tends to reside, could lower FX volatility over the medium term, though in the near term, outflows could lead to some FX weakness. Second, funds previously invested in the 1-month tenor could shift into the shorter-dated FASBI deposits or into the longer-dated SBIs or treasury bills. However, the move is not expected to expand loan disbursement. That said, BI is expected to develop the interbank money market further as a source of stable funding for banks. If successful, the excess funds previously parked in SBI may enter the interbank call money markets, providing a funding substitute to deposits. If so, this might help reduce the overall cost of funds in the banking sector.
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