(March 10): Indonesia’s central bank may continue to defend the rupiah around a key threshold as volatile oil prices, a stronger dollar and risk-off flows tied to the Iran conflict deepen concerns over the nation’s investment appeal.
Bank Indonesia is expected to keep intervening to hold the rupiah below the psychologically important 17,000 per dollar mark, according to analysts. Uncertainty over how long the war may last is compounding Indonesia’s existing economic concerns while elevated crude prices risk stoking inflation in the net oil importer.
Pressure on the rupiah highlights mounting risks for Southeast Asia’s largest economy, where sustained currency weakness may strain fiscal metrics in the months ahead. After a string of warnings from rating companies about Indonesia’s economic trajectory, BI’s ability to steady the currency may be critical to restoring investor confidence.
“Dollar strength and weak sentiment are weighing more on the rupiah now and BI could see scope to defend the 17,000 level strongly,” said Lloyd Chan, currency strategist at MUFG Bank Ltd. “It’s both about anchoring sentiment and to prevent a sharp deterioration of the external balances.” The rupiah closed at 16,945 per dollar on Monday.
Since late 2024, Bank Indonesia has stepped up efforts to stabilise the rupiah. It has done so by selling US dollars from its foreign-exchange reserves to buy rupiah, purchasing government bonds in the secondary market and using non-deliverable forwards to shape market expectations.
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Still, further intervention may prove difficult to sustain given relatively thin reserve buffers, said Manthan Shingala, an analyst at Nomura Singapore Ltd, who sees the rupiah potentially weakening toward 17,200 per dollar by the end of the month. Foreign reserves fell to US$151.9 billion in February, according to Bank Indonesia data, the steepest monthly drop since April.
Sentiment has already soured this year. MSCI Inc flagged a possible market downgrade over liquidity and low free-float concerns while both Moody’s Ratings and Fitch Ratings Inc lowered Indonesia’s credit outlook on its fiscal trajectory and policy direction. Meanwhile, the Jakarta Composite Index of shares has fallen more than 15% so far this year to become one of the world’s worst performers.
“A key catalyst for a stronger recovery would be a positive response from MSCI to the structural reforms being implemented by the Indonesia Stock Exchange to improve market liquidity and free float,” said Mohit Mirpuri, senior partner at SGMC Capital Pte.
See also: Emerging currencies rebound as Trump says Iran War may end soon
Oil fell Tuesday after US President Donald Trump said the conflict with Iran would be resolved “very soon", easing immediate fears of supply disruptions. The rupiah strengthened on Tuesday, moving away from Monday’s record low of 17,015 per dollar while equities advanced, offering policymakers a measure of relief after days of market pressure.
The central bank has pledged “firm and consistent interventions” in onshore and offshore foreign-exchange markets to cushion the currency. If global headwinds persist, “we think policymakers could lean towards preserving intervention space for the longer term,” said Audrey Ong, FX strategist at Barclays Bank plc.
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