Macro Strategy: The Currency Conundrum

Stock Code	Last Price	Change	Change %
MORA	6.825	875	14,71%
SRAJ	14.425	575	4,15%
AALI	7.175	425	6,30%
GGRM	17.175	375	2,23%
BDMN	4.720	310	7,03%
INDR	2.310	250	12,14%
PTBA	2.830	180	6,79%
APIC	1.435	145	11,24%

Macro Strategy

The Currency Conundrum

IDR undervaluation is widening, but persistent external pressure raises structural shift risks and increases BI hike probability.
Outflow risks remain the key catalyst, keeping pressure on market and FX, reinforcing the need for stronger stability measures.
Bond and equity divergence continued, with recent foreign inflows into SBN contrasting with persistent equity foreign outflows.

Mispricing or Structural Shift? Relentless selling pressure on the IDR remains unabated, with the currency depreciating by 4.6% YTD. While our analysis based on both Purchasing Power Parity (PPP) and Real Effective Exchange Rate (REER) metrics suggests that the IDR is increasingly undervalued, the persistence of external pressure indicates that the weakness may no longer be driven solely by cyclical market mispricing. Instead, it may signal a gradual shift in the currency’s structural equilibrium, requiring more coordinated counter policies from key stakeholders to restore confidence, anchor expectations, and prevent further pressure on the IDR. The continued pressure on IDR has brought it closer to the worst-case scenario we highlighted in “The Next Constraint” on 27 April. As such, we believe the probability of a BI rate hike has increased considerably at this juncture. While BI may still prefer using FX intervention, SRBI liquidity absorption, and bond market stabilization as first line measures, the current persistent deterioration in IDR raises the need for a policy rate response to anchor expectations and restore market confidence.

Based on our PPP study, which uses 2019 as the base year to reflect a relatively stable pre pandemic benchmark, IDR appears increasingly undervalued. Under this approach, misvaluation measures the gap between the actual USDIDR exchange rate and the inflation adjusted equilibrium level implied by relative inflation differentials between Indonesia and the US. A higher positive misvaluation indicates that USDIDR is trading above its PPP implied fair value, meaning the IDR is weaker than long term macro fundamentals would suggest. Since 2022, IDR PPP mis-valuation has widened materially, reflecting persistent USD strength and elevated global interest rates. Based on our estimates, misvaluation reached around 25.8% in FY2025, or around IDR3,375 above fair value, before widening to around 28.9% as of May 2026, or roughly IDR3,800 above fair value. Core inflation-based PPP estimates suggest deeper undervaluation, as Indonesia’s contained inflation profile should have supported a stronger IDR.

Our REER analysis also points to broad based IDR undervaluation beyond the bilateral USD relationship. Indonesia’s REER has continued to decline and is now close to levels seen during previous external stress episodes, including the 2015 Fed tightening cycle and the 2020 pandemic shock. It also remains materially below its rolling 5Y and 10Y averages, suggesting that the IDR is trading at relatively weak levels in broad real effective terms. The weakness is also visible in the Nominal Effective Exchange Rate, or NEER, which has remained under pressure. This suggests that IDR depreciation is not merely driven by inflation differentials, but also by broader nominal weakness against major trading partners. In our view, the simultaneous decline in both REER and NEER supports the view that current IDR weakness is increasingly structural and externally driven.

Beyond the USD, the IDR has also weakened against most major and regional currencies this year. As of 13 May 2026, USDIDR had depreciated by 4.64% YTD, while the average YTD exchange rate reached IDR16,974 per USD, well above the 2026 state budget assumption of IDR16,500 per USD. The IDR also weakened against key developed market currencies, including the EUR (+4.37%), JPY (+3.87%), GBP (+5.14%), CHF (+6.15%), and CAD (+4.88%). A similar pattern is visible against regional and emerging market currencies, with the IDR depreciating against the CNY (+7.21%), MYR (+8.21%), and SGD (+5.22%).

This broad-based weakness suggests that IDR depreciation is not only a bilateral USD issue but also reflects relative underperformance against both developed market and regional currencies. While PPP and REER metrics continue to point to substantial IDR undervaluation versus its long run equilibrium level, the persistence of this deviation appears to reflect prevailing global macro financial conditions. Elevated US Treasury yields, the Fed’s higher for longer policy stance, sustained demand for USD assets, and continued dollar exceptionalism have kept broad USD strength intact and, thus, limited the near-term recovery room for IDR. Such situation requires more domestic centric policies response, potentially through both rate hike and IDR liquidity tightening.

The Next Key Risk. Negative sentiment from the recent MSCI rebalancing announcement and FTSE Russell decision continues to add pressure on potential foreign outflows. In its May 2026 review, MSCI removed 6 Indonesian stocks from the MSCI Global Standard Index and excluded 13 stocks from the MSCI Small Cap Index. While the changes will only become effective on 29 May, the announcement already triggered additional equity market outflows of around IDR1.5tn on the announcement day, although the bond market continued to record inflows over the past week. Pressure was further amplified by FTSE Russell’s announcement of a potential move similar to MSCI regarding HSC-related deletions, effective 22 June, adding further outflow risk.

The more important catalyst will be MSCI’s June 2026 Market Accessibility Review, which will determine whether restrictions such as the Foreign Inclusion Factor and Number of Shares freeze, limits on Investable Market Index additions, and restrictions on upward size segment migration will be lifted ahead of the August 2026 review cycle.

The combination of continued outflow risks and Rupiah pressure has pushed both the government and Bank Indonesia to place market stability as a key policy priority. As discussed in our previous report, “The Stability Push”, the government has started preparing the revival of the Bond Stabilization Fund, aimed at supporting government bond buybacks when yields rise excessively. At the same time, BI has continued to intervene through aggressive IDR liquidity absorption via SRBI and operation twist measures, which have pushed short end yields significantly higher.

Since March, BI’s net SRBI issuance has reached around IDR130tn, reflecting continued liquidity tightening to support the Rupiah. However, this liquidity absorption has been partly offset by BI’s SBN purchases to stabilize INDOGB yields, with BI increasing its SBN holdings by around IDR140tn over the same period. Meanwhile, banks have reduced their SBN holdings by a similar amount, around IDR140tn, which should help return some IDR liquidity to the financial system and partly cushion the tightening impact from SRBI issuance.

BRI MSME Index: Still Expansionary in 2Q26 although growth may moderate. Indonesia’s MSME sector continued to demonstrate resilient performance in 1Q26, with the BRI MSME Business Index rising to 104.7 from 102.5 in the previous quarter, indicating stronger business activity and confidence among micro, small, and medium enterprises. The improvement was mainly supported by seasonal demand during the festive periods, which boosted household consumption and business turnover. Additional support came from THR disbursements, government social assistance amounting to IDR39.8 tn, as well as stronger agricultural and plantation commodity prices during the harvest season, which helped sustain rural purchasing power.

Based on sectors, most MSME sectors remained in expansionary territory, particularly agriculture, trade, manufacturing, transportation, and hospitality-related services. Agriculture benefited from the harvest season and improving commodity prices, while trade and manufacturing were supported by stronger festive demand and higher consumer spending. Meanwhile, construction and mining activity remained relatively weak due to heavy rainfall and delayed project implementation during the quarter.

MSME sentiment also remained positive in 1Q26, with the Business Sentiment Index standing at 110.8, although slightly lower than the previous quarter as post-holiday optimism began to normalize. Regionally, MSME activity remained broadly expansionary, with 28 provinces recording indices above 100 and 17 provinces above the national average. Major economic provinces, including DKI Jakarta, Central Java, and East Java, also posted MSME readings above the national benchmark. Looking ahead, MSME activity is expected to remain expansionary in 2Q26, although growth may moderate as seasonal demand normalizes following the festive period.

Fixed Income vs Equity Divergence. The 10Y UST yield rose 10 bps w-w to 4.46%, while the 2Y UST yield increased 11 bps to 3.98%, continuing its flattening curve trend. In the domestic market, the 10Y INDOGB yield declined 7 bps w-w to 6.69%, with foreign still add position with Indonesia’s 5Y CDS spread tightened slightly by 1 bp w-w to 84 bps. In FX, the US Dollar Index strengthened 0.56% w-w to 98.58, while the Rupiah weakened 0.44% against the USD, closing at IDR17,465.

Fixed Income Flows. Based on 12^th May data, foreign investors recorded a weekly net inflow of IDR0.66tn, bringing total foreign holdings to IDR868 tn. On an MTD basis, foreign net inflows reached IDR1.55tn. Among domestic investors, banks recorded a strong weekly net inflow of IDR35.28tn (MTD inflow of IDR23.53tn), remaining a key source of domestic SBN demand. By contrast, Bank Indonesia, excluding repo transactions, recorded a weekly net outflow of IDR36.45tn (MTD outflow of IDR33.76tn). Mutual funds added IDR1.35tn in weekly inflows, while insurance companies and pension funds jointly recorded a weekly net inflow of IDR3.49tn.

Equity Flows. The JCI declined 3.5% last week to 6,723, marking the weakest performance in the region, mainly driven by the MSCI announcement on the exclusion of several Indonesian names. On a YTD basis, the market is down 22%, also the worst among regional peers. Despite the shortened week with only three trading days, foreign investors still recorded a weekly net outflow of IDR2.7tn.

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