As volatile oil prices, a stronger US dollar, and risk-off flows related to the ongoing Iran conflict create clouds over Indonesia’s investment appeal, the archipelagic nation’s central bank may continue to defend the rupiah below the key psychological threshold of 17,000 per US dollar, analysts stated. While there has been an uncertainty over how long the Middle East conflict may last, it is further complicating Indonesia’s existing economic concerns, as elevated crude prices risk stoking inflation for the net oil-importer.
While the pressure on the rupiah highlights mounting risks for Southeast Asia’s largest economy, where sustained currency weakness may strain fiscal metrics in the months ahead, Bank Indonesia’s (BI) ability to steady the currency will face an investor confidence test, especially given that rating companies have already issued warnings on the archipelagic nation’s overall fiscal health.
“Dollar strength and weak sentiment are weighing more on the rupiah now, and BI could see scope to defend the 17,000 level strongly. It’s both about anchoring sentiment and to prevent a sharp deterioration of the external balances,” said Lloyd Chan, currency strategist at MUFG Bank, while interacting with The Business Times.
Bank Indonesia, since 2024, has stepped up its efforts to stabilise the rupiah, by selling US dollars from its foreign-exchange reserves to buy the Southeast Asian country’s domestic currency, purchasing government bonds in the secondary market, and using non-deliverable forwards to shape internal market expectations.
Manthan Shingala, analyst at Nomura Singapore, who sees the rupiah potentially weakening towards 17,200 per US dollar by the end of March 2026, says further BI sustained intervention may prove difficult, given relatively thin reserve buffers. In fact, according to the central bank’s data, the Southeast Asian country’s foreign reserves fell to USD 151.9 billion in February, the steepest monthly drop since April 2025.
“Sentiment has already soured this year. MSCI flagged a possible market downgrade over liquidity and low free-float concerns, while both Moody’s Ratings and Fitch Ratings lowered Indonesia’s credit outlook on its fiscal trajectory and policy direction. Meanwhile, the Jakarta Composite Index of shares has fallen around 15 per cent so far this year, becoming one of the world’s worst performers,” reported The Business Times.
“A key catalyst for a stronger recovery would be a positive response from MSCI to the structural reforms the Indonesia Stock Exchange is implementing to improve market liquidity and free float,” mentioned Mohit Mirpuri, senior partner at SGMC Capital.
Audrey Ong, FX strategist at Barclays Bank, told Bloomberg, “The central bank has pledged firm and consistent interventions in onshore and offshore foreign-exchange markets to cushion the currency. If global headwinds resume, we think policymakers could lean towards preserving intervention space for the longer term.”