Indonesian Rupiah: Policy mix supports currency, challenges persist – Commerzbank

Commerzbank’s Charlie Lay and Dr. Henry Hao note that Bank Indonesia kept the BI-Rate at 5.75% while tightening liquidity conditions via a higher Deposit Facility rate and lower reserve requirements to support the Indonesian Rupiah. They highlight that IDR remains under pressure despite hedging incentives and FX intervention, with USD/IDR back above 18,000 and the currency down 7.3% year-to-date.

Bank Indonesia balances FX and growth

"Bank Indonesia (BI) left the BI-Rate unchanged at 5.75% at its October meeting, against a divided market consensus. In a Bloomberg survey, around half of the 38 analysts expected no change, while the other half expected at least a 25bp hike. The rationale for the rate hike camp centred on persistent IDR weakness and capital outflows following MSCI's warning that Indonesia could be downgraded from emerging-market to standalone status. The decision marks the fourth consecutive hold following cumulative hikes of 100bp between May and June."

"Rather than raising the benchmark rate, BI adopted a combination of measures to support IDR while ensuring that it did not hurt the growth momentum. It raised the overnight Deposit Facility rate by 25bp to 5.00%, reduced banks' reserve requirement ratio (RRR) by 200bp in two stages to 7% by December, and increased incentives for foreign investors to hedge their IDR exposure through domestic non-deliverable forwards (DNDF)."

"The outlook for IDR remains challenging despite BI's efforts to attract foreign inflows. USD/IDR rose back above 18,000 following the announcement. IDR is down 7.3% vs USD year-to-date. BI's hedging incentives have reportedly attracted USD9.9bn in foreign inflows since June, but these measures may be insufficient to offset sustained portfolio outflows, particularly if MSCI proceeds with its proposed downgrade. The widening current-account deficit and elevated global yields also leave IDR vulnerable."

"In the near term, we see BI maintaining its preference for FX intervention, attractive short-term yields and hedging incentives. Another 25bp hike is not ruled out entirely if IDR sees renewed strong selling pressure. A sustained recovery in IDR will depend not only on BI's policy response but also on an improvement in global financial conditions and the restoration of foreign investor confidence in Indonesian assets."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)