* Bid to turn non-tradeable govt bonds into tradeable form
* Rupiah volatility is focus of attention
(Adds details, quotes)
By Gde Anugrah Arka
JAKARTA, Nov 25 (Reuters) - Indonesia's central bank on Wednesday said it was looking at ways to deal with rupiah volatility after saying last week it was considering capital controls, news that knocked the currency.
Darmin Nasution, acting governor of Bank Indonesia (BI), said the central bank will seek parliament's approval to turn non-tradeable government bonds held by the central bank into a tradeable form. That might provide an instrument for BI to help deal with currency volatility.
Foreign investors have been big buyers of Indonesian stocks , bonds and the rupiah currency this year thanks to political and economic stability.
"We are studying the exchange rate volatility, including our monetary instruments," the Senior Deputy Governor said.
"I won't comment further, we are still studying it."
Last week, the central bank played down the immediate threat of capital controls on short-term debt after its earlier mention of such limits hit the rupiah, as Brazil, Taiwan and other countries acted to curb hot money inflows.
A source told Reuters Bank Indonesia was studying foreign ownership limits on one-month SBIs.
Analysts said the move probably was not imminent, but that the central might sell less SBIs, particularly one-month paper, once its government debt holdings become tradeable, encouraging investors to buy longer maturities.
"We won't change our policy stance in managing inflows," deputy governor Budi Mulya told reporters on Wednesday after a parliamentary hearing.
The central bank's short-dated paper, known as SBIs, provide a liquid form of investment, but the authorities are keen to coax investors into longer-dated government bonds instead.
A senior trader at a foreign bank, who declined to be quoted by name, said relying more on bonds and less on SBIs may help reduce rupiah volatility, because the bond market was much less liquid than short-dated central bank paper.
"Unlike in the SBI market, it won't be that easy to trade in and out of the bond market, so in a way, investors will be prompted to invest longer and this could reduce the volatility in the currency market," he said.
RETURN TO NORMAL
Turning untradeable government bonds into tradeable paper -- a move which will be put to parliament for approval in January -- could gradually lead to better bond market liquidity.
Indonesia's Vice President Boediono, a former central bank governor, also waded into the debate on Wednesday, saying the government was not in favour of restricting foreign investment flows through capital controls, and he called on the central bank to consider lifting its existing curbs on capital outflows.
"We should be prepared to put (up) some regulations, hopefully market-friendly regulations, that will focus on incentives rather than stopping" capital inflows, Boediono told journalists.
"Some regulations were put into force in abnormal times. I think we should look at that again. We do it to avoid speculation during bad times. During normal times you don't do that," he said when asked whether existing controls should be lifted.
"The central bank should look at that," he said.
Boediono is still considered influential at the central bank, and the rupiah rose against the dollar on his comments.
"They must have had a lot of co-ordination going on" between the government and the central bank about this issue, said Suryanto Chang, head of treasury, at Bank OCBC NISP in Jakarta.
When Boediono left his post as governor of Bank Indonesia earlier this year to run as vice president, he was not replaced. However, the acting governor, Nasution worked closely with Finance Minister Sri Mulyani Indrawati and Boediono before he moved to the central bank.
Curbs on foreign exchange outflows were introduced about a year ago during the global credit crisis and include limits on the amount of rupiah that individuals can change into foreign currency in a bid to stop speculation.
Foreign banks, which previously had done a lot of foreign exchange trading for commercial and retail customers, have been lobbying the authorities to lift the restrictions given the crisis has passed. (Additional reporting by Sonya Angraini, Adriana Nina Kusuma, and Andreas Ismar; Writing by Sara Webb; Editing by Matthew Jones) ((ga.arka@thomsonreuters.com; Reuters Messaging: ga.arka.reuters.com@reuters.net; +62 21 384 6364 ext 911)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))