By Randy Fabi and Rieka Rahadiana
JAKARTA, July 10 (Reuters) - Asian central banks are
expected to adopt divergent strategies to protect their
economies against weaker growth and scary foreign capital
outflows as they hold policy reviews amid a sea-change in
For much of Asia, the prospect of the U.S. Federal Reserve
winding down its easy money policies has removed the headache of
asset-inflating inflows, though the speed at which funds have
pulled out has created a whole new set of worries for some.
Central banks in Indonesia and India, which rely on foreign
capital to fund current account deficits and are therefore more
vulnerable to portfolio outflows, have been forced to intervene
in the market to defend their weakening currencies.
Bank Indonesia is expected to hike its benchmark policy rate
for a second consecutive month at a policy review on Thursday,
and could announce surprise measures to counter surging
inflation, a declining rupiah currency and falling
foreign exchange reserves.
"The limelight is certainly on Bank Indonesia (BI),
especially following the recent comment that they have a mix of
policies in their toolbox to cope with the recent spike in
inflationary pressures," said Gundy Cahyadi, economist at OCBC
But for other Asian central banks, the situation is not as
dire as capital outflows and inflation remain manageable.
They are unlikely to immediately tighten broadly easy
policy settings in response to the changing Fed outlook.
Thailand's central bank on Wednesday kept its policy rate
unchanged at 2.50 percent as expected, after a recent cut to
support growth and curb capital inflows.
Malaysia and South Korea were expected also to hold policy
rates steady when their monetary policy committees meet on
"Asian central banks are generally mercantilist and will
pick a weaker currency and higher growth," said Sean Yokota,
head of Asian strategy at SEB. "The pace (of a currency's
decline) may be open to debate, but the direction is fine with
In Indonesia, however, Yokoto noted that inflation was
likely to head above 8 percent by year-end. Even if that was not
sustained, he said, interest rates at 6 percent and 5-year
government bond yields at 6.7 percent were too low.
Indeed, Bank Indonesia last month became the first Asian
central bank to hike its benchmark rate since 2011, and was
widely expected to follow with another 25-basis-point move to
6.25 percent on Thursday.
"Countries that run current account deficits tend to be more
vulnerable because of the pressure in the balance of payments.
As a whole though, external liquidity risk in the region remains
manageable at least for now," Cahyadi said.
BIG TOOL KIT
Beyond raising its benchmark rate, BI could also hike its
overnight deposit facility rate (FASBI) after the central bank
indicated it would "strengthen its policy mix" at this week's
meeting, analysts said.
BI has also hinted it could soon introduce measures like
tradable term deposits and an auction market in foreign exchange
swaps to stem the flow of foreign funds.
Analysts believe Indonesia should also introduce
macroprudential measures such as a holding period for exporters'
profits to slow declining foreign exchange reserves, which
dropped to a two-year low of $98.1 billion in June.
Indonesian policymakers were not alone in reviewing their
full range of tools in the face of the biggest inflection point
for investors since 2008.
India's regulators on Monday toughened rules for derivatives
trading in the currency market in a bid to arrest the steep
decline of the rupee, which fell to a record low against the
dollar this week and is emerging Asia's worst performer this
(Additional reporting by Sonali Desai in SINGAPORE, Kitiphong
Thaichareon in BANGKOK, Christine Kim in SEOUL and Anuradha
Raghu in KUALA LUMPUR; Editing by Simon Cameron-Moore)