UPDATE 3-Indonesia cbank scraps 6-mth SBI debt to counter hot money

Wed Feb 9, 2011 11:06am GMT

* Central bank to focus on longer tenors, non-tradeable deposits

* Bank sees rupiah above 8,900 per dollar; inflation above target

* Analysts say bank wants to eliminate SBIs (Updates with details, quotes, auction results)

By Aditya Suharmoko

JAKARTA, Feb 9 (Reuters) - Indonesia's central bank will no longer regularly sell its six-month SBI debt in monthly auctions in an attempt to drive investment to longer-term instruments, as emerging markets around the world seek to counter hot money flows.

Bank Indonesia (BI) sold 14 trillion rupiah ($1.57 billion) of nine-month SBIs and 30 billion rupiah of nine-month sharia SBIs in Wednesday's auction, both with a rate of 6.70542 percent, after receiving offers totalling 37.22 trillion rupiah.

It plans to issue a six-month term deposit this week, while aiming to sell a nine-month term deposit at a later date, deputy governor Budi Mulya said before the auction.

Analysts said the bank was moving to replace SBIs with term deposits -- which are not tradeable and must be held to maturity -- and short-term deposit facilities (FASBI) to absorb excess liquidity in the financial system.

As of Feb. 1, foreigners held 142.68 trillion rupiah of SBIs, or 23 percent of the total, latest data shows -- down from 200.11 trillion rupiah in the first week of January.

In a BI auction last month, the weighted average yield for six-month SBIs was 6.1 percent and for nine-month SBIs 6.5 percent.

Authorities are trying to smooth volatility in short-term instruments amid fears that any sharp outflow of funds could threaten stability and the rupiah.

Indonesian stocks, bonds and the currency fell last month as investors took profits from a strong rally in 2010 and worried that the central bank was behind the curve in tackling growing inflationary pressures.

Mulya said he expected the rupiah to strengthen to above 8,900 to the dollar in coming months, from around 8,915 currently, and that inflation could rise above the target of 4-6 percent this year.

The central bank last week hiked its key policy rate by 25 basis points to 6.75 percent, surprising many market watchers, in an attempt to head off price pressures. SBIs are expensive for BI because the yields are based on its benchmark interest rate.

From Nov. 5 to Jan. 14 foreign investors bought 17.7 trillion rupiah of six-month SBIs after they could no longer purchase the three-month SBIs.

"Efforts to shift excess liquidity that is piling up in short tenors to longer tenors are expected to reduce the dependency of market players on placing short-term funds in BI's monetary instruments, supporting financial deepening," said BI spokesman Difi A. Johansyah.

BI introduced a 28-day minimum holding period for its SBIs in June last year, driving investors out of a one-month tenor that had been popular for its high yields and liquidity and towards three- and six-month tenors and government debt.

It then stopped selling three-month SBIs in November last year. It has issued term deposits as replacement, with a five-month term deposit first introduced last month.

"This is BI's scenario: to eventually eliminate SBIs," said Juniman, an economist at Bank Internasional Indonesia in Jakarta.

"In effect, foreigners can't put in funds that may destabilise the rupiah. They will move to the bond market then, which will be positive to finance the state budget and in driving the real sector."

Analysts see the government could start issuing T-bills with maturity of less than a year once the central bank stops issuing SBIs.

"The government shouldn't be too afraid on refinancing risks by issuing shorter-dated T-bills. The instruments are needed by banks," said Anton Gunawan, an economist at Bank Danamon in Jakarta.

Ultra-low interest rates in developed markets have been driving a flood of money towards emerging markets where yields are higher, leading countries from Taiwan to Brazil to impose capital controls to stem the rise in their currencies. ($1 = 8,925 rupiah) (Additional reporting by Adriana Nina Kusuma and Rieka Rahadiana; Editing by Neil Chatterjee and Kim Coghill)

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