Concerns Over Fiscal Health Drive Pressure on the Rupiah
The Rupiah slipped against the United States dollar on Monday, extending the Indonesian currency’s losses recorded so far this year as mounting fiscal concerns and a strengthening greenback added to the depreciation pressure.
According to data compiled by Bloomberg, the Rupiah closed the trading session at Rp 16,610.5, reflecting a marginal decline of 0.06 percent from the value recorded in the previous session.
The currency’s year-to-date depreciation now stands at 3 percent, leaving it hovering near the weaker end of its 52-week trading range, which spans from 15,065 to 17,224.
Despite the continued market pressure, Bank Indonesia (BI) Governor Perry Warjiyo sought to reassure lawmakers, asserting that the Rupiah’s movements remain “under control.”
He emphasized that the central bank is actively intervening across multiple segments of the financial markets, specifically mentioning operations in the spot, non-deliverable forward (NDF), and domestic bond markets to curb excessive volatility.
“We are committed to stabilizing the rupiah while maintaining growth momentum,” Perry stated during a parliamentary hearing on Monday.
In a significant move to support economic growth, the central bank had previously cut its benchmark interest rate by 25 basis points to 5 percent just last week, simultaneously lowering the deposit facility to 4.25 percent and the lending facility to 5.75 percent.
Since September 2024, BI has collectively eased its policy rate by a total of 150 basis points, prioritizing growth, even as market investors increasingly voice concerns regarding the government’s fiscal discipline and its impact on the Rupiah’s stability.
Fiscal Expansion Widens Deficit and Increases Currency Risk
The Indonesian government’s expansionary fiscal measures, including major stimulus programs and a higher projected budget deficit for 2026, are contributing significantly to market sentiment that is weighing down the value of the Rupiah.
Lukman Leong, an analyst at Doo Financial Futures in Jakarta, directly attributed the persistent currency weakness to domestic policy, stating, “The rupiah remains under pressure from loose fiscal measures and widening deficit risks.”
He pointed to several high-profile government spending initiatives that are effectively widening the fiscal gap.
These initiatives include the substantial Rp 200 trillion ($12 billion) fund placement in state-owned banks, a separate Rp 16.23 trillion stimulus program, and the recently introduced nationwide Free Nutritious Meal scheme, all of which require significant public funding.
Furthermore, market participants are currently adjusting their expectations to account for the higher projected deficit outlined in the draft 2026 budget.
The fiscal shortfall is now projected to reach Rp 689.1 trillion, which represents 2.68 percent of GDP.
This latest figure is a notable increase from an earlier draft that projected a deficit of Rp 638.8 trillion, or 2.48 percent of GDP.
This upward revision in the deficit outlook signals to investors an increased borrowing need, which can create upward pressure on bond yields and negatively impact the Rupiah by raising the perceived risk associated with Indonesian sovereign debt.
Central Bank Intervention and Global Dollar Strength
Bank Indonesia is expected to continue its aggressive intervention strategy to manage volatility in the Rupiah, a necessity compounded by the strengthening of the US dollar following signals from the Federal Reserve of a more hawkish stance.
Globally, the US dollar strengthened against most currencies after the Federal Reserve signaled a more hawkish stance in its latest meeting, which generally involves a commitment to maintaining higher interest rates for longer.
This posture by the Fed has the effect of making dollar-denominated assets more attractive, thereby drawing capital away from riskier emerging-market currencies, including the Rupiah.
The confluence of domestic fiscal concerns and the robust, rising global strength of the dollar places BI in a challenging position, requiring constant and substantial intervention to maintain stability.
Lukman Leong anticipates that Bank Indonesia will continue its active “triple intervention” strategy—covering the spot, NDF, and bond markets—to successfully limit daily volatility in the exchange rate.
He forecasts that the Rupiah will likely trade within a narrow band of 16,500 to 16,650 per dollar in the immediate near term.
The central bank’s commitment to both currency stabilization and supporting economic growth means it must carefully balance the use of its reserves for intervention with the maintenance of low interest rates to stimulate domestic economic activity.
This ongoing tightrope walk highlights the persistent challenges faced by the Rupiah due to both internal policy choices and external monetary forces.
