An all-out approach to restore FX stability and mounting economic pressure has, instead of reassuring markets, left investors in jitters.
Persistent rupiah weakness, with recent sharp declines since Middle East conflict
IDR has been down ~5% since the start of the Middle East conflict. The rupiah has come under intense pressure amid a stronger USD, elevated oil prices, rising inflation concerns, and tighter global financial conditions. A subdued domestic growth outlook has also weighed on capital flows into the country.
A whopping 50bps rate hike catches markets off guard
On Thursday, BI unexpectedly raised its policy rate by 50bps to 5.25%, ending a seven-month pause, as it moved to defend the rupiah and pre-empt inflation risks amid sharp FX depreciation and a narrowing interest rate differential with the US.
Expect more policy surprises ahead
Markets are now pricing in further rate hikes in the coming quarter. Oil prices, a key factor contributing to Indonesia’s currency weakness and inflationary pressures, are expected to remain elevated above US$100 per barrel in the near term. Should rupiah sustain its depreciation momentum, we think that BI is likely to prioritise USDIDR stability even at the expense of growth.
That said, a de-escalation in the Middle East conflict, which could ease pressure on the IDR, may allow BI to temporarily look through the currency weakness and adopt a wait-and-see approach before considering further rate hikes.
Rate hikes to defend IDR, but at what cost?
The tightening cycle is likely to come with growth trade-offs.
While BI maintained its 2026 GDP growth forecast of 4.9% –5.7%, growth could moderate as higher rates weigh on domestic demand and investment activity.
To manage these pressures, there are several measures that Bank Indonesia (BI) can take.
- On the currency side, BI is expected to intensify FX intervention, raise SBRI rates to attract inflows, lower thresholds for cash FX purchases, and tighten oversight of institutions with large USD demand. Higher yields on SRBI and SBN have helped revive foreign portfolio inflows in 2Q26.
- On borrowing rates, BI is likely to maintain accommodative liquidity conditions through reserve requirement cuts and continued money market injections to support growth.
A commodity export shake-up: Centralising exports under Danantara's oversight
In an attempt to contain currency and fiscal weakness, President Prabowo also announced this week that Indonesia will centralise exports of key commodities, including coal, palm oil, and ferroalloys, under a designated state-owned enterprise, managed by Danantara, Indonesia’s sovereign wealth fund. As the world’s largest exporter of these commodities, Indonesia is seeking to retain more export earnings onshore, with Prabowo framing the decision as a way to “prevent earnings being held offshore” and curb under-invoicing of commodity exports. This comes as the government reiterated a fiscal deficit target of 1.8%–2.4% of GDP, underscoring its focus on fiscal discipline amid external pressures.
However, markets reacted defensively to the news, with the Jakarta Composite Index falling ~2.4% as tighter oversight of commodity exports fueled concerns over greater state control and weaker profitability.
The pattern of sudden policy shifts may be a “boon” for country, but a bane for investors.
Impacts on equities and market cap
Weakening macro fundamentals, including rupiah depreciation, rising inflation concerns, and softer growth prospects, have increasingly weighed on Indonesian equities. According to recent data compiled by Bloomberg, Singapore has now overtaken Indonesia as SEA’s largest stock market, with Singapore’s market capitalisation rising to US$645 billion, while Indonesia’s has declined over 30% from its January peak to US$618 billion. While investor sentiment towards Indonesian equities has deteriorated amid uncertainty over equity reclassification and credit rating outlook downgrades, Singapore stocks, on the other hand, have benefited from relative economic stability and government-led efforts to revitalise its market. We think that the divergence in equity performances, has also been driven in part by currency moves, with rupiah weakness weighing on Indonesian assets while the Singapore dollar has strengthened following tighter monetary policy by MAS at its April meeting.
Staying cautious amid headwinds ahead
Amid the volatility and the sell-off in IDR and Indonesian equities, investors should caution against rushing to buy the dip. While the government has under taken an all-out effort to support currency stability, caution is still warranted given ongoing policy uncertainty and weakening macroeconomic fundamentals. We think that beyond the market impact, the abruptness and frequency of regulatory changes are a greater concern, signalling rising regulatory risk. So far, the Indonesian government does not have a strong track record in turning things around. Equity valuations will continue to price in a higher regulatory discount. Near-term risks around FX stability, higher interest rates, and slowing growth are also likely to keep sentiment subdued until macro conditions stabilise, which in turn remains partly dependent on other external factors as well, such as developments in the Middle East conflict.
