With the rupiah continuing its slide against the US dollar, the central bank, Bank of Indonesia (BI), must move more swiftly and aggressively in raising interest rates and tightening up the local forex market to protect it from speculative trading, local media on Monday quoted analysts as saying.

Meanwhile, the rupiah has suffered from a continuous slide for 13 days and was bought at 10,405 per dollar and sold at 10,435 on Saturday morning, its lowest point since January 2002.

The government must also have the political courage to cut the country's costly fuel subsidies by increasing fuel prices, analysts told the Jakarta Post.

Oil prices that are still hovering around 66 US dollars a barrel have put pressure on the rupiah as the government needs more dollars to pay for oil imports amid rising fuel consumption and declining oil production.

Further pressure has come from local companies, which also need more dollars to pay for their imports and service their foreign debts.

In his latest economic assessment, Standard Chartered economist Fauzi Ichsan outlined four measures that the central bank and the government must quickly take to prevent the situation from further worsening.

"BI should hike its one-month SBI rate to a double digit level from the current 8.75 percent," he said. "The central bank should also revise its recent regulation restricting short-term foreign investments in the country."

As for the government, Fauzi suggested a gradual increasing of fuel prices to cut fuel subsidies, and increasing the market's dollar supply by speeding up its 4.5 trillion rupiahs (about 450 million US dollars) privatization program for state firms, despite

the possibility of a political backlash.

"It is up to the authorities to act now," he said. "Given the circumstances, the government and BI have limited choices and may have to bite the bullet."

Fauzi's views were echoed by Citigroup economist Anton Gunawan, who said that interest rates needed to be further upped by at least 50 basis points (0.5 percent).

"The key to the depreciation of the rupiah is that BI has been very late in responding to increases in interest rates," Anton was quoted by AFP as saying.

BI hiked its reference BI Rate from 8.50 to 8.75 percent earlier this month, and its one-week overnight rate for banks from 7 percent to 7.5 percent. Its dollar deposit rate, however, still stands at 3 percent.

Higher interest rates help absorb market liquidity and boost the rupiah's attractiveness.

BI governor Burhanuddin Abdullah said last week that the central bank would soon increase interest rates again.

Currency analyst Farial Anwar of the Currency Management Group, however, questioned the effectiveness of increasing interest rates, and instead suggested a sterner crack down on speculators by tightening trading on the forex market.

"BI must particularly watch out for foreign speculators hitching on the back of local traders," he said.

"The government should reconsider its free forex trading policy, and oblige companies to repatriate their dollar export revenues."

BI is considering raising once again its reserve requirement for banks, which was last raised in June from 5 percent to between 6 and 8 percent, as well as lowering the ceiling for dollar transactions not backed up by underlying assets, after lowering it

in July from 3 million US dollars to 1 million US dollars.

Farial also welcomed the government's idea of converting into rupiah up to 500 million US dollars of its 1 billion US dollars foreign exchange reserves held at the central bank to help boost the rupiah.

Source: Xinhua