Dec.10, 2009, 09:04:47 GMT (Reuters)

JAKARTA, Dec 10 (Reuters) - Indonesia's central bank on Thursday suggested it is not in favour of capital controls but is looking at encouraging investors to shift out of short-term debt into long-term securities to tackle hot money inflows.

Southeast Asia's biggest economy has seen strong capital inflows this year on the back of political stability and a favourable economic outlook.

Authorities are concerned over hot money inflows, particularly into central bank short-dated debt instruments or SBIs, because of the cost of offsetting, or sterilising, their impact and the risk such flows can quickly change direction and hit the rupiah currency.

Budi Mulya, a Bank Indonesia (BI) deputy governor, on Thursday said that limitations on capital inflows were "irrelevant" and "inconsistent" with Indonesia's fundamentals.

When asked whether the central bank could encourage investors to buy longer-dated central bank debt rather than one-month SBIs, he said: "Tactically, directing one-month to longer periods could be done and it is BI's consideration."

SBIs have a maturity of between one and six months. They are a very liquid form of investment, which makes them popular with foreign investors. Stocks have risen more than 80 percent this year, while the rupiah currency is up 16 percent against the dollar this year.

"It must be frustrating for the central bank that SBIs, which are an important tool of monetary management, are being impacted by the winds of foreign investment," said Robert Prior-Wandesforde, senior Asian economist at HSBC in Singapore.

"If there is a cheapening of six-month relative to one-month, investors will automatically shift to the six-month, so the central bank will achieve what they want without having to impose any capital controls."

The yield on one-month SBIs auctioned by the central bank has fallen from 6.47613 percent on November 18 to 6.46166 percent on December 9, while the yield on six-month paper has increased from 6.69412 percent to 6.69762 percent.

Initial comments from the central bank last month, that it was studying the possibility of controls in response to hot money inflows, hit the rupiah.

Since then, the central bank appeared to have backed away from the idea. Central bank and finance ministry officials have said they want to encourage investment in longer-dated bonds, for example by turning untradeable bonds held by the central bank into a tradeable form. Such a move could help to increase the liquidity of existing bonds.

Mulya said that the central bank and capital markets regulator Bapepam were looking at introducing other money market instruments.

"There must be (other instruments) and together with Bapepam we are thinking how we can make sufficient instruments available in the money market, more than those available now," he said.

"We will also discuss who will be the regulator, we must start to discuss this."