Rupiah to Extend Losses as Bank Indonesia Battles Volatility

(Bloomberg) -- The Indonesian rupiah will extend this year’s 4% decline due to fragile investor confidence, spurring further intervention by the central bank to stem volatility, according to analysts.

MUFG Bank Ltd. expects the currency will weaken to 17,100 per dollar in coming months, while Barclays Bank Plc says its likely to test 17,200 by the first quarter of 2026 with Bank Indonesia intervening. The rupiah closed Monday at 16,805.

The rupiah is the only major Asian currency to decline against the dollar this year as concerns grow over President Prabowo Subianto’s controversial fiscal policies. The slide is putting pressure on the central bank as it balances efforts to support the currency, while keeping interest rates low to support growth.

PT Bank Permata’s chief economist Josua Pardede and PT Bank Danamon’s Hosianna Evalita Situmorang both say Bank Indonesia may defend the currency when it weakens past 17,000. It slid a record low of 16,957 per dollar on April 9.

“If the rupiah breaches this threshold, the potential for market panic may increase, which could ultimately trigger greater capital outflows and further pressure on the exchange rate,” Bank Permata’s Pardede said.

Overseas investors have sold more than $1 billion of Indonesian stocks and $428 million of the nation’s bonds bonds this month, data compiled by Bloomberg show. The rupiah slid for a fifth week last week, the longest string of such losses since October 2023.

A weakening currency may accelerate capital outflows, while seeking to support the currency risks shrinking the central bank’s foreign reserves. Bank Indonesia currently sits on a record high stockpile of reserves, boosted by tax and service revenues as well as the withdrawal of the government’s foreign loans. 

“We expect BI to lean heavily on its reserves” and tools such as domestic non-deliverable forwards to smooth volatility, while still tolerating some degree of currency adjustment, said Karinska Salsabila Priyatno, an analyst at PT Mirae Asset Sekuritas Indonesia.

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