Macro Strategy

The Next Constraint

 

• IDR weakness reflects external, seasonal, and differential pressures. We shift our pessimistic scenario into the baseline.
• BI is stepping up offshore, onshore, and SRBI measures, with rising SRBI yields signaling a tighter liquidity stance.
• El Niño and higher fertilizer costs could raise food inflation risks, with pressure likely peaking in early of next year.

 

Rupiah Under Pressure. The IDR has taken the center stage, as it has continued to weaken, breaching IDR 17,300 level. On YTD basis, the currency has depreciated by 3.1%, one of the weakest among regional peers. While markets appear to be less reactive to Middle East developments, even as no formal negotiations are planned and tensions around the Strait of Hormuz remain elevated, we see that recent IDR movements are increasingly driven by other factors beyond geopolitics. We assess 3 key risk factors:

 

External factors. The DXY has recently eased to around 98–99, retreating from levels above 100 at the peak of Middle East tensions. Despite this softer external backdrop, the IDR continues to weaken, and this divergence may signal that current pressures are less about broad EM outflows and more about idiosyncratic domestic risks. Expectations that the Fed will remain on hold suggest the DXY may stay relatively stable which limit any near-term tailwind for the IDR.

Seasonal factors are also adding to depreciation pressure. The April to May dividend repatriation season typically lifts corporate USD demand, while the same period may also see higher travel-related FX demand. This is consistent with historical patterns, where April has recorded average IDR depreciation of around 0.5%, making it one of the seasonally weaker months (Exhibits 2). In addition, the maturity of earlier FX fixing positions appears to be another contributing factor to near-term USD demand.

The differential factor. Structural pressure is also reflected in narrowing yield and policy rate differentials. The 10Y INDOGB–UST spread has declined to around 230 bps, narrowing by 30 bps from mid-March. Meanwhile, the policy rate differential between Indonesia and the US is now around 100 bps, and even lower in real terms after adjusting for inflation. This tighter differential has contributed to foreign outflow pressure, with equity markets recording c IDR40tn YTD outflows, while bond markets remain in net outflow of IDR22 tn YTD despite recent inflows. Foreign ownership in the SBN market also remains low at around 12.7%. While this reduces the risk of sudden large foreign selling, it also limits USD supply and leaves the IDR more vulnerable to demand shocks.

 

Having said that, we now shift our scenario band and move our earlier pessimistic scenario into the base case. Under this baseline, we expect the IDR to average around 17,100, with foreign SBN participation at around 12.7% and the 10Y INDOGB yield at 6.69% by year-end. In a downside scenario, where the Rupiah weakens toward 17,400 and yields rise above 7%, a 25 bps BI rate hike would become more plausible.

 

Monetary Rapid Response. BI has stepped up its stabilization efforts as IDR depreciation has persisted, using both offshore and onshore instruments, including spot FX intervention and DNDF operations. The central bank reiterated that the IDR remains undervalued relative to its fundamentals, while FX reserves are still sufficient to support stabilization. BI has also adjusted the SRBI yield structure to attract portfolio inflows and help anchor FX demand. Following the introduction

 

of its new FX measure in early April, average daily spot transactions declined from around USD78 mn to USD60 mn as of April 17, suggesting some initial positive impact. However, IDR pressure has continued despite these measures.

 

A key part of BI’s latest response is the targeted policy that allows primary dealers to sell USD NDF, effectively taking long IDR positions in the offshore market to support stability. This measure complements BI’s existing onshore DNDF operations, rather than introducing a new onshore instrument. It is important because the offshore NDF market has historically operated beyond BI’s direct reach, often acting as a key price setter and overshooting during periods of stress. Previously, BI mainly relied on spot FX intervention and onshore DNDF operations to guide expectations, leaving offshore pricing influenced only indirectly. By allowing calibrated offshore participation, BI can now influence market expectations more directly, helping to reduce speculative pressure and narrow offshore-onshore misalignment while maintaining market discipline.

 

Participation under this framework is tightly governed to contain risks. Primary dealers are prohibited from transacting with offshore affiliates to prevent regulatory arbitrage. They must also use NDF strictly for hedging purposes rather than proprietary positioning, maintain robust margining arrangements, including credit support annexes with at least six domestic banks, and submit regular reports to BI. The framework will also be reviewed every three months to assess its effectiveness and ensure proper risk management.

 

BI has also continued to use SRBI as a key monetary operations instrument to attract portfolio inflows through more competitive yields, particularly since February. During the recent RDG, BI highlighted that cumulative foreign inflows into SRBI had reached nearly IDR55tn as of April. In the latest auction, SRBI yields rose by another 14 bps to 5.88%, bringing the cumulative increase to around 116 bps from 4.72% in January. At the same time, the awarded amount reached IDR45.5tn, one of the highest in a single auction, while the bid to cover ratio was close to 1x. This suggests that BI has been deliberately calibrating issuance to absorb liquidity and maintain a tight stance. This points to a measured liquidity contraction through SRBI, aimed at supporting IDR stability while keeping yield levels sufficiently attractive to sustain foreign participation.

 

Watch Out for El Niño inflation risk. Weather transition is becoming an additional inflation risk, on top of the already higher inflation outlook from rising energy prices. Rising fertilizer prices add another upside risk to food inflation. The Iran US war has disrupted shipments through the Strait of Hormuz, also a key route for fertilizer trade, pushing up natural gas, ammonia, and urea costs. Lower fertilizer use, if then followed by El Niño, could further worsen the decline in crop yields, especially for perennial crops. Weather patterns suggest that El Niño is developing rapidly, raising the risk of drier weather conditions in the western Pacific, including Indonesia. In an El Niño year, sea level pressure typically falls over the eastern and central Pacific, while pressure rises over the western Pacific and Indonesia. This weakens the Walker circulation, reduces rainfall over Indonesia, and increases the risk of drought.

 

The latest Australian Bureau of Meteorology update indicates that El Nino Southern Oscillation (ENSO) remains neutral, but model forecasts point to continued warming in the tropical Pacific, with levels consistent with El Niño possible by July 2026. BoM’s Relative Niño 3.4 threshold for El Niño is sustained monthly readings above +0.8°C, while several international

 

models suggest the risk of a stronger El Niño developing later in the year. This is also broadly in line with BMKG’s March projection, which expects El Niño to peak between July and September 2026. Our key findings are as follows:

 

1. Past El Niño episodes show clear food inflation pressure. Indonesia has experienced several El Niño episodes, with the 2015 to 2016 episode providing the clearest case study. Volatile food inflation rose to 9.7% in August 2015 and remained elevated even after the El Niño peak, mainly due to drought-related supply shocks in annual crop such as rice, chilli, and shallots. Government rice imports helped ease pressure only partially. The more recent 2023 to 2024 episode coincided with the global rice crisis, which amplified domestic price pressure. Rice inflation rose by 17.6% YoY, with a peak of 20.8%, pushing volatile food inflation to 10.3% in March 2024. While headline inflation remained contained at around 2.3% to 3.5%, volatile food inflation stayed elevated after the peak, highlighting the persistence of food price pressures.
2. The inflation impact usually comes with a lag. Historical patterns suggest that El Niño transmits to consumer prices sequentially. Volatile food inflation typically peaks around four to six months after El Niño intensifies, reflecting the time needed for production losses to move through supply chains, distribution channels, and finally retail prices. With El Niño expected to peak in 3Q26, the strongest inflation pressure is likely to emerge in 4Q26 to 1Q27.
3. A Strong El Niño could materially lift volatile food inflation. Strong El Niño episodes tend to push volatile food inflation around 62% higher than neutral conditions, with average volatile food inflation reaching around 6.9% y-y. For headline inflation, this implies an additional 0.8 to 1.0 ppt increase. If realized, this would complicate Bank Indonesia’s easing path, especially when IDR stability already requires a more cautious policy stance. By contrast, La Niña tends to have a more limited impact on inflation.
4. Commodity impacts are also important. We also find strong correlations between El Niño shocks and several commodity prices. Rice prices show a strong correlation with a lag of around nine months, driven by delayed planting, late rainfall, and a prolonged lean season, which can create an annual supply gap. Garlic prices respond with a longer lag of around twelve months, likely reflecting Indonesia’s reliance on imports from China and the timing of import contract cycles. IMF research also highlights that other commodities such as coffee, cocoa, and palm oil can be affected, although with much more delayed effect. Mining activity, particularly nickel production, may also face operational constraints, as some activities rely on hydropower. Lower rainfall and weaker river flows could reduce power availability and constrain output.

 

Capital Market - The Volatility Returns. Bond yields moved higher across both global and domestic markets. The 10Y UST yield rose by 5 bps w-w to 4.31%, while the 2Y UST yield increased by 7 bps w-w to 3.78%. In the domestic market, the 10Y INDOGB yield rose more sharply by 20 bps w-w to 6.78%, while risk perception also edged higher, with Indonesia’s 5Y CDS widening by 7 bps w-w to 89 bps. On FX, the DXY strengthened by 0.71% w-w to 98.79, while the IDR weakened slightly by 0.09% w-w to IDR17,205/USD.

 

• Fixed Income Flows. Foreign flows in the SBN market remained relatively muted, with small w-w net outflow of IDR0.06 tn (as of 23 April data). Total foreign holdings were broadly steady at IDR857tn, while MTD inflows remained positive at IDR3.52 tn. Domestic flows were more mixed. Banks recorded a sizeable w-w inflow of IDR20.44 tn, although they still posted an MTD outflow of IDR44.37 tn. BI, excluding repo transactions, recorded a w-w outflow of IDR29.29tn and a small MTD outflow of IDR0.32 tn. Meanwhile, mutual funds posted a w-w inflow of IDR0.69 tn, while insurance and pension funds recorded a combined w-w inflow of IDR3.04 tn.
• Equity Flow - The JCI declined by 6.6% last week, marking the weakest performance among regional peers. This brought its YTD return to -17.5%, also the worst in the region, underscoring the depth of pressure on the domestic equity market.Selling pressure was broad-based across sectors, while foreign outflows intensified significantly, reaching IDR4.9 tn during the week

 

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