SINGAPORE (REUTERS) - The Indonesian rupiah fell on Tuesday even though the country's parliament took a big step that should help stabilise the currency by paving the way for a fuel price hike.
The rupiah fell as much as 0.7 percent to 9,955 per dollar because the coming price hike was seen as accelerating inflation.
Later, the currency recovered some of the slide as the central bank was spotted providing dollar liquidity, traders said, and it was 0.3 percent down at 9,915 as of 0338 GMT (11.38am Singapore time).
Lawmakers agreed late Monday night to a revised 2013 budget to raise gasoline and diesel prices after months of delay that has undermined confidence in the government and put pressure on the rupiah.
While reduced fuel subsidies will cut Indonesia's worrying current account and budget deficits, parliament's move did not provide the rupiah any immediate support.
"It creates more two-way price actions in dollar/rupiah, but it isn't a game changer," said Jonathan Cavenagh, a senior FX strategist at Westpac in Singapore, adding the price hike will fuel inflation expectations.
"Dollar/rupiah is still a buy on dips in my view with one-month NDFs a buy from 9,950, targeting a move up to 10,200,"Cavenagh said.
One-month dollar/rupiah rose 0.8 percent to 10,135.
Indonesia, along with India, are the most vulnerable among emerging Asian markets to capital outflows, which were triggered recently by expectations the US Federal Reserve will reduce its monetary stimulus. These countries run massive current account deficits that are financed primarily by foreign portfolio investments.
Last week, the rupiah fell below 10,000 to the dollar for the first time since 2009, traders said.
To support the currency, the central bank last week surprisingly raised both the benchmark interest rate and its overnight deposit facility (FASBI) rate.
It's not clear when the Indonesian government will raise fuel prices, which are expected to go up an average 33 percent.
Finance Minister Chatib Basri was expected to hold a press conference at midday on Tuesday.
If the price hikes accelerate inflation, that could cause more selling of Indonesian bonds, analysts said.
Cutting fuel subsidies "is positive in the long run for Indonesian macro stability, but in the short term is likely to trigger a rise in inflation, bond yields and capital outflow," Credit Agricole CIB said in a client note.
Barclays said in a note the hikes will boost inflation by 250 basis points (bps), pushing the annual pace to 8.2 percent by the end of this year.
It forecasts additional rate hikes - 50 bps for the FASBI rate and at least 25 bps in the benchmark rate.
But Westpac's Cavenagh said it may be difficult for Bank Indonesia to further hike interest rates, given a slowdown in the regional economy.
"In an environment where Asian growth is cooling, will BI feel comfortable about raising rates aggressively in the current environment? Not sure about that," Mr Cavenagh said.
Foreign holdings in Indonesian tradable government bonds were 32.6 percent as of June 13, compared with nearly 34 percent at the end of May, according to the government data. Foreigners sold nearly US$1 billion in bonds during that period.