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Bank Indonesia steps in to support weaker rupiah

Bank Indonesia steps in to support weaker rupiah

Bank Indonesia stepped in to support the rupiah after the currency weakened past 16,000 per US dollar for the first time in four years.

The central bank said it intervened mainly in the spot and domestic non-deliverable forwards markets, adding that the rupiah’s weakness was mainly driven by risk-off sentiment and US dollar gains.

The rupiah fell as much as 2.1% to 16,190 per US dollar, the weakest level since April 2020, as local markets reopened yesterday after being shut since April 8 for the Aidil Fitri holiday.

The rupiah’s decline adds more pressure on Bank Indonesia as it seeks to maintain stability in the currency amid persistent US dollar strength and foreign capital outflows.

The nation’s foreign-currency reserves fell US$3.6bil last month as the authorities intervened in the currency and bond markets.

“Rupiah stability is a priority in Bank Indonesia policy consideration,” said Winson Phoon, head of fixed-income research at Maybank Bhd in Singapore.

“While we don’t think US dollar-rupiah spot of 16,000 is a line in the sand for Bank Indonesia to hike rates, it still has a relatively high sensitivity to the risk of additional hawkish repricing in US rates.”

The risk-off sentiment in global markets over the past week also flowed into other assets, with Indonesia’s benchmark stock index dropping as much as 3%. The yield on benchmark 10-year government bonds jumped 17 basis points to 6.82%, tracking moves in US Treasuries.

The rupiah has been under pressure for most of this year amid concern President-elect Prabowo Subianto’s spending plans will burden the country’s budget.

At the same time, a hawkish repricing of US Federal Reserve interest-rate expectations has bolstered the US dollar.

Bank Indonesia unexpectedly raised interest rates last October after an extended bout of currency weakness.

Some market watchers speculate a rate hike may be back on the table at the central bank’s April 24 meeting.

“We think Bank Indonesia can tolerate US dollar-rupiah spot slightly higher than 16,000” but a quick surge toward the 16,500 area raises the odds of a rate hike, Maybank’s Phoon said.

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