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The central bank kept its benchmark interest rate unchanged this week, raised its overnight deposit facility rate, announced cuts to banks' reserve requirement ratios (RRR) and offered additional foreign exchange hedging discounts. The combination prompted some economists to question the rationale behind the seemingly divergent measures. Read more: Japan’s Nikkei falls over 1% as Wall Street tech selloff rattles markets Firman Mochtar, Bank Indonesia's head of economic and monetary policy, said the measures were intended to align the central bank's policy rate with its monetary operations strategy. The increase in the deposit facility rate restores symmetry to the interest rate corridor, bringing both the deposit and lending facility rates to 75 basis points from the benchmark rate. Previously, the gap between the benchmark rate and the deposit facility rate was wider at 100 basis points because of government fund placements in commercial banks, Firman said, according to Reuters. The government had shifted excess cash from the central bank to state-controlled lenders to boost banking system liquidity. However, some of those funds have since been withdrawn following a change in leadership at the finance ministry. Read more: South Korean shares fall 2% as AI selloff weighs on global markets Firman said aligning the interest rate corridor with the central bank's monetary policy objectives would be more appropriate going forward. He added that the adjustment was consistent with Bank Indonesia's plans to reduce reserve requirements and that the central bank had briefed market participants on the changes. Reserve requirement cuts to boost liquidity Bank Indonesia plans to reduce reserve requirements by a cumulative 200 basis points by December. Changes to its liquidity incentive scheme are expected to bring the effective reserve ratio down to around 2%, approximately 100 basis points below its previous level. The central bank estimates the measures will inject around 90 trillion rupiah ($4.98 billion) into the banking system. Firman said the additional liquidity had been calculated to remain consistent with the central bank's benchmark rate and economic activity. Erwin Gunawan Hutapea, Bank Indonesia's head of monetary management, said the central bank also wanted commercial banks to favour shorter-dated instruments rather than park excess funds in its rupiah-denominated securities, known as SRBI. Bank Indonesia had previously raised interest rates on SRBI to attract foreign capital inflows. However, the outstanding amount of these securities has declined from 1,096 trillion rupiah in July to below 950 trillion rupiah, Erwin said. Bank of America reassesses policy mix Bank of America economists initially described Bank Indonesia's approach as holding, hiking and cutting rates simultaneously, characterising the combination as perplexing. They later said the measures appeared less contradictory than they had initially seemed, citing the bank's research note. The economists argued that cuts to reserve requirements did not necessarily signal a reduced willingness by the central bank to raise its benchmark interest rate if economic conditions warranted such a move. The policy package highlights Bank Indonesia's effort to balance monetary policy objectives with the need to improve liquidity in the banking system. The central bank aims to strengthen the transmission of interest rate decisions to lending and economic activity while providing additional liquidity to support credit growth. (Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.) (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today. Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today. Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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