Rupiah Falls on Policy Easing Concerns, Credibility Risks

The Indonesian rupiah hovered near the key IDR 17,000 level on Friday in holiday-thinned trade, heading for a modest weekly decline amid a firm U.S. dollar index as Middle East tensions persisted. President Trump said the war with Iran could last another two to three weeks, though he signaled it was nearing an end. Domestically, caution lingered ahead of March's forex reserves data after February’s drop to a three-month low. Trade figures showed subdued exports despite resilient imports during the festive period, underscoring external pressures. Inflation risks also grew amid elevated oil prices, even as annual figures eased in March, back within Bank Indonesia’s target. As a net oil importer, Indonesia remains vulnerable to sustained energy costs, which could widen the fiscal deficit under President Prabowo’s spending plans. Authorities are exploring measures to limit the impact, while Bank Indonesia has moved to curb speculation after cutting rates by 150bps since September 2024.

The Indonesian rupiah remained weak on Thursday, hovering just above the psychological IDR 17,000 per dollar and extending its recent slide. Pressure was driven by a firm U.S. dollar index, reinforced by geopolitical tensions after President Donald Trump, in a national address, signaled possible further military action against Iran. Domestic buffers also weakened as the trade surplus narrowed in February, reflecting subdued exports and solid import growth. At the same time, caution mounted ahead of March's forex reserves data, following February’s fall to a three-month low. Elevated oil prices and geopolitical risks continue to pose upside threats to inflation, even as annual readings eased to 3.48% in March, back within Bank Indonesia’s target range. Fiscal strain is building amid sustained energy costs and President Prabowo’s flagship program. Still, Bank Indonesia has introduced new measures to curb speculation, underscoring its priority to safeguard currency stability.

The Indonesian rupiah weakened past the key psychological level of IDR 17,000 per dollar on April’s first trading day before trimming some losses, though pressure persisted amid a broadly firm U.S. dollar index as uncertainty over the Middle East conflict lingered. Domestic data weighed further, with February’s trade surplus falling short of market expectations as exports stayed subdued while imports continued to grow at a double-digit pace, partly reflecting higher energy costs. Elevated global oil prices have also raised upside risks to inflation, despite annual figures easing to a three-month low of 3.48% in March, back within Bank Indonesia’s 1-1/2%–3-1/2% target range. Meantime, the OECD cut Indonesia’s 2026 growth forecast to 4.8% from 5.0%, citing energy prices and geopolitical risks. On the policy front, Bank Indonesia’s new measures to curb speculation against the rupiah took effect on Wednesday, though their impact may be limited by relatively thin foreign exchange reserves.