USDIDR update
The rupiah has been Asia's standout underperformer year-to-date, with USDIDR rallying almost 8% since the beginning of 2026, printing a fresh record high of 18,190 on June 8th.
The pair's grind higher began well before the latest geopolitical flare-up, pressured through Q1 by foreign equity outflows, a narrowing trade surplus, and growing unease over President Prabowo's expansive fiscal agenda. The outbreak of direct hostilities between the US, Israel, and Iran at the end of February has been an accelerant for IDR weakness, with the rupiah losing roughly 7% since the war began. As a net oil importer with a ballooning fuel subsidy bill, Indonesia sits at the sharp end of the energy shock. Higher crude prices simultaneously widen the external deficit and strain public finances, a toxic combination for a currency already trading on thin confidence.
While conflict in the Middle East remains the primary cause of recent IDR depreciation, domestic politics has compounded the squeeze on the currency.
The June 4th passage of legislation expanding Bank Indonesia's mandate to include real sector growth, while handing parliament greater oversight and a new mechanism for removing board members, has crystallised investor fears over central bank independence, first stoked by the appointment of the President's nephew as Deputy Governor in February. Both Moody's and Fitch have cut their outlooks to negative, citing diminished policy credibility, while FX reserves have been drained to near two-year lows in efforts to moderate the pace of currency weakening. Recent estimates now suggest that Indonesia’s import cover has fallen below 5 months, substantially below the level of reserves held by peer economies.
This erosion of reserves and concern over IDR depreciation, underpinned a larger-than-expected 50bp hike by BI in May, an off-cycle 25bp move on June 9th, taking the policy rate to 5.50%, and administrative measures capping unhedged dollar purchases.
Still, we see the resulting pullback in USDIDR as a temporary reprieve, absent further action. The current US-Indonesia policy rate differential remains low versus recent history, with further rate rises likely needed to encourage sufficient inflows to stabilise the currency, albeit at the cost of further straining public finances.
Our tactical base case, therefore, looks for a resumption of USDIDR upside, with FX reserves used to manage the pace of increase, and to limit excess volatility, ensuring that moves higher remain orderly, but with reserve depletion limiting BI's capacity to lean against currency depreciation pressure.
Further rate increases are likely, but we suspect that the adverse impact on public finances will prevent overly aggressive tightening. An S&P credit rating decision and an MSCI equity decision are key catalysts to watch in the coming weeks. Downgrades by one or both would provide a possible trigger for renewed IDR selling, with 19,000 a level to watch for more sustained BI intervention efforts.
Longer term, we think USDIDR stabilisation is likely to require a durable Middle East ceasefire that brings oil sustainably lower, narrowing Indonesia’s fiscal deficit, and curtailing Fed rate hike expectations. The lack of progress seen in recent negotiations between the US and Iran leaves the timing of any deal highly uncertain, however, posing a key challenge to our central expectation. Aside from Middle East developments, we are cognisant that BI could prove more aggressive than we envisage in our baseline. We see this as a rising upside risk for IDR, especially given the recent signal of resolve from BI.