Indonesia’s plan to create a domestic rupiah NDF market

JAKARTA: Indonesia’s central bank plans to issue regulatory measures that will permit banks in the country to trade nondeliverable forwards in the domestic currency market.

The new measure is aimed at stabilising the rupiah, whose losses of around ninw per cent versus the dollar this year have re-ignited concerns about capital outflows.

Non-deliverable forwards are offshore dollar-settled currency derivatives used by investors with limited access to onshore markets to hedge their exposure or speculate. By their nature, there is no actual delivery of the underlying currency, and the contracts are merely used to synthetically generate a forward hedge.

Bank Indonesia (BI) wants to create a parallel non-deliverable forward market for the rupiah onshore as an alternative hedging instrument for businesses and foreign investors.

BI wants to bring sizeable speculative activity in the NDF markets onshore and under its immediate purview. The market is often heavily one-sided, volatile and a source of anxiety for investors in the rupiah.

Given the heavy foreign investment in Indonesia’s bond markets and companies, NDF volumes are significant so keeping those flows onshore could give the central bank a better grip on rupiah.

That in turn could narrow the gap between NDF and onshore rupiah forward rates. Thursday’s levels put one-year NDF at 15,830 rupiah per dollar, versus 15,645 onshore and a spot rate of 14,915.

Malaysia introduced similar measures in late 2016 and early 2017 to put a floor under its currency. Malaysia first brought the processes for setting benchmarks for ringgit NDFs onshore and then banned participants in its domestic markets from trading NDFs.

Created in the early 1990s as a way for speculators to beat emerging market capital controls, NDFs were designed to be traded at an arm’s length from the regulators in the countries of the underlying currencies.

In this regard, Bank Indonesia’s requirement that the domestic NDF transactions be backed by genuine underlying transactions, suchasinvestor exposure to bonds or stocks, could make them less attractive for foreign market participants.