Rupiah Extends Losses as Dollar Strength, Fiscal Risks Weigh

The Indonesian rupiah weakened toward IDR 18,040 per U.S. dollar on Thursday, continuing its previous decline amid broad-based dollar strength ahead of next week’s Federal Reserve meeting, where interest rates are widely expected to remain unchanged. Locally, oil prices around USD 100 per barrel added to fiscal concerns, while a steeper rise in food costs linked to El Niño sustained inflationary pressures. Sentiment was further dampened by President Prabowo’s criticism of MSCI’s proposed changes to Indonesia’s market classification, deepening worries about potential foreign capital outflows. Still, Bank Indonesia’s liquidity measures may have helped cushion the decline. The central bank held its key rate steady for a fourth straight month in October but raised the deposit facility rate by 25bps to 5%. It also announced reserve requirement cuts for commercial banks, from 9% to 8% from Nov. 1 and to 7% starting Dec. 1, expected to inject around IDR 190 trillion into the banking system.

The Indonesian rupiah traded near IDR 18,000 per U.S. dollar on Wednesday afternoon, recovering from an intraday low of IDR 18,060 after Bank Indonesia kept its key interest rate unchanged at 5.75% for a fourth straight month. To support the currency amid a market selloff sparked by MSCI’s warning over Indonesia’s market status, the central bank raised its deposit facility rate by 25bps to 5% and enhanced incentives for DNDF hedging to help attract foreign capital. To bolster domestic liquidity, the board cut the reserve requirement ratio by 1 ppt to 8% starting Nov. 1 and further to 7% from Dec. 1, a measure expected to inject around IDR 190 trillion into the financial system. Governor Destry Damayanti noted that cumulative rate hikes of 100bps earlier this year had helped anchor inflation expectations. Globally, the dollar index steadied after touching a three-week low, helped by rising oil prices that rekindled inflation concerns and reinforced safe-haven demand for the greenback.

The Indonesian rupiah hovered near IDR 17,970 per dollar on Wednesday, extending strength for a third session as the US dollar remained under pressure after the dollar index fell to a three-week low. Softer US Treasury yields and easing crude oil prices reduced support for the greenback, helping lift emerging market currencies, including the rupiah. Traders awaited Bank Indonesia's policy decision later today, with markets expecting the central bank to raise its key rate by 25bps to 6% after keeping it steady for the third straight month following 100bps of cumulative hike earlier this year. Sentiment was also aided by receding concerns over MSCI potentially reclassifying Indonesia as a standalone market, after regulators launched measures to address concentrated share ownership and strengthen disclosure requirements. However, the upside was capped by persistent fiscal concerns and cost pressures, as El Niño-related food prices accelerated and September inflation hit a three-month top.