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The Role of Government Securities as Monetary Instruments in Open Market Operations

The Role of Government Securities as Monetary Instruments in Open Market Operations. Dr Miranda Goeltom Deputy Governor Bank Indonesia 25 July 2000. Overview. Introduction Macro Environment of the Indonesian Government Bond Market Current Implementation of Monetary Policy

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The Role of Government Securities as Monetary Instruments in Open Market Operations

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  1. The Role of Government Securities as Monetary Instruments in Open Market Operations Dr Miranda Goeltom Deputy Governor Bank Indonesia 25 July 2000

  2. Overview • Introduction • Macro Environment of the Indonesian Government Bond Market • Current Implementation of Monetary Policy • Government Bonds as OMO Instruments • Government Bonds as Market Development Instruments • Conclusion

  3. Introduction • Rationale for bank recapitalisation programme • Need for an active bond market • Liquidity for restructured banks • Reduced dependence on international capital • Infrastructure for development of domestic debt market

  4. Current Indonesian Government Bond Market • Fixed rate bonds (Rp126 trillion) • 5 series • Coupons 12-14% • Maturities 5-10 years • Variable rate bonds (Rp227 trillion) • 16 series • Coupons determined from SBI rates • Maturities 2-9 years

  5. Rupiah exchange rate Jan-00 Rolling 12-month GDP Emergence from economic crisis of 1997/98 Improving economic performance Inflation and SBI rates Monthly exports

  6. Current Implementation of Monetary Policy • Objectives • Fulfilment of monetary targets • Signalling policy intentions • Use of SBI for monetary policy operations • Constraints • Relationship between base money and the inflation rate • Financial markets not well developed • Inflation targeting as an alternative approach?

  7. Government Bonds as OMO Instruments • Use of SBI as monetary policy instrument poses a conflict of interest for Bank Indonesia • Need for a sovereign benchmark yield curve • Move to T-bills requires planning in the areas of • Overall level of government debt • Use of funds raised by issuance of T-bills • Homogeneity of sovereign debt market • Yield curve development strategy

  8. SBI and Base Money

  9. Bonds as Market Development Instruments Operation of the Benchmark Yield Curve Impact onreal sector Interest rate Intermediation byfinancial markets Focus of central bank attention Maturity

  10. Bond Market Development Initiatives • Scripless registry for SBI and government bonds • “Delivery versus Payment” clearing and settlement system • Support for Repo transactions • Appointment of Primary Dealers/Market Makers • Formation of Debt Management Unit at Ministry of Finance

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