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

Commerzbank analysts Charlie Lay and Dr. Henry Hao indicate that Bank Indonesia maintained the BI-Rate at 5.75% while implementing a mix of policy tools to bolster the Indonesian Rupiah (IDR). These measures included raising the overnight Deposit Facility rate by 25 basis points to 5.00%, decreasing the reserve requirement ratio (RRR) by 200 basis points in two stages to 7% by December, and offering enhanced incentives for foreign investors to hedge their IDR exposure via domestic non-deliverable forwards (DNDF).

Despite these efforts, the IDR remains under pressure, with USD/IDR surging back above 18,000 following Bank Indonesia's announcement. The currency has also declined by 7.3% year-to-date. While hedging incentives and FX intervention have attracted USD9.9bn in foreign inflows since June, these measures may not be enough to counter sustained portfolio outflows, especially if the International Monetary Fund (IMF) proceeds with its proposed downgrade.

In the short term, Bank Indonesia is expected to continue favoring FX intervention, attractive short-term yields, and hedging incentives. Another 25 basis point hike is not entirely ruled out if the IDR experiences renewed intense selling pressure. A sustained recovery in the currency's value will depend not only on Bank Indonesia's policy response but also on improvements in global financial conditions and the restoration of foreign investor confidence in Indonesian assets.