Indonesian Rupiah gains on easing political uncertainty despite MSCI outflow risks

• Indonesian Rupiah strengthens as political uncertainty eases following Vice President Gibran Rakabuming’s resignation, with economic activity unaffected.
• Indonesia’s 10-month budget deficit hit 1.47% of GDP, while MSCI index removals heighten foreign capital outflow risks.
• Hotter US inflation fuels December Fed rate hike bets, limiting USD/IDR downside ahead of Friday’s US PPI report.

USD/IDR pulls back after reaching a record high of 18,285 in the previous day, trading around 18,220 during Asian hours on Friday. The pair is depreciating as the Indonesian Rupiah (IDR) finds support from easing political uncertainty following the resignation of Indonesian Vice President Gibran Rakabuming, alongside government assurances that economic activity remains uninterrupted.

Providing further fiscal context on Friday, Finance Minister Suahasil Nazara reported that Indonesia recorded a budget deficit of 379.3 trillion rupiah ($20.81 billion), or 1.47% of GDP, over the first 10 months of 2026. From January through October, revenues climbed 24% year-on-year to 2,618 trillion Rupiah, while total spending rose nearly 16% to 2,997.2 trillion Rupiah, keeping the full-year 2026 deficit on track to meet the government's unchanged projection of 2.85% of GDP.

However, the Rupiah still faces mounting foreign outflow risks after MSCI’s November review removed Barito Pacific and Bumi Resources from its global index, leaving only seven Indonesian constituents, including the country's four major banks.

Meanwhile, the USD/IDR pair’s downside may be limited as the US Dollar (USD) stands to regain ground on persistent inflation concerns and expectations of tighter monetary policy. Stronger-than-expected US Consumer Price Index (CPI) data released earlier this week has reinforced forecasts for a Federal Reserve rate hike in December, particularly after Fed Governor Christopher Waller noted that a 50-basis-point increase should be considered if core inflation stays elevated.

Meanwhile, traders are now pricing in nearly 85.5% odds of a Fed rate hike when the central bank next meets December 8-9, and put the odds of a half-point hike at 14.5%, according to the CME FedWatch tool. Investors are now turning their attention to Friday’s US Producer Price Index (PPI) report for further insight into the central bank's rate path, with October headline PPI expected to rise 6.6% year-on-year, and core PPI projected to increase 5.0%.

Williams flags resilient US economy and persistent inflation, keeping Dollar bias supported

Fed’s Williams delivered a moderately hawkish message, with a 7/10 FXS Speechtracker score standing above the 6.1/10 historical average, underscoring a firmer policy tone relative to the established baseline. Emphasis on a “resilient” and “robust” US economy, alongside “stubbornly persistent” and “too elevated” inflation, signals that the central bank still sees a need to “act over time” and that “work” remains to reach the right monetary policy stance, supporting expectations for tighter conditions and a constructive backdrop for the Dollar. The clarification that monetary policy targets inflation rather than rolling back overall price levels also reinforces a focus on stabilizing inflation without engineering a deep downturn.

The FXS Fed Sentiment Index slipped by 0.08 points to 147.47, indicating a slight pullback in hawkish intensity even as the overall stance remains firmly in hawkish territory. With the index well above the neutral 100 mark, Williams’ remarks continue to support a hawkish policy bias despite the marginal softening in the aggregate signal captured by the FXS Fed Sentiment Index and the FXS Speechtracker.