Stability remains the priority amid rupiah pressure

Bank Indonesia (BI) kept the BI Rate unchanged at 5.75% in October but raised the Deposit Facility rate by 25 bps to 5.00% (still maintain Lending Facility rate at 6,50%), reinforcing its focus on exchange-rate stability without further tightening the benchmark rate. The rupiah weakened around Rp18.000/USD amid heightened global uncertainty and concerns over Indonesia’s potential MSCI reclassification.

By increasing the cost of holding short-term rupiah liquidity and strengthening FX hedging incentives, BI is attempting to improve the appeal of rupiah assets while preserving support for domestic growth. However, the effectiveness of these measures will depend increasingly on investor confidence and global risk appetite, rather than interest rate differentials alone

Liquidity easing supports credit

BI is lowering average reserve requirements in stages by December 2026, from 9% to 7% for conventional banks and from 7.5% to 5.5% for Islamic banks, to improve liquidity and support credit growth. Current money market indicators do not suggest an outright liquidity shortage: the overnight interbank rate, INDONIA, fell to around 5% in mid-October, below the 5.75% BI Rate, while declining repo balances and substantial SRBI maturities point to improving rupiah liquidity.

Nevertheless, bond market conditions remain vulnerable, with the 10-year SBN yield rising to around 7.4% during the recent sell-off and the spread over U.S. Treasuries offering only a limited buffer against currency and country risks.

This suggests the challenge is less about an absolute shortage of domestic liquidity and more about the uneven distribution of funds, cautious duration positioning and the risk premium demanded by investors; lower reserve requirements may support credit intermediation, but cannot by themselves reverse foreign selling or restore confidence in longer-duration assets.

A pre-emptive defence

While September inflation rose to 3.28% YoY, remaining within BI’s target range, and core inflation moderated to 2.84%, risks to the policy outlook continue to stem more from the external sector than from domestic price pressures. The prospect of renewed outflows following MSCI’s reclassification warning remains a key concern, particularly given estimates that passive outflows alone could reach USD4–6bn, with additional active fund selling potentially amplifying pressure on domestic financial markets. These risks are further compounded by elevated oil prices, tighter-for-longer U.S. monetary policy, and higher global bond yields, all of which could weigh on the rupiah and increase imported inflation pressures.

Notably, BI’s decision at the latest RDG to raise the Deposit Facility by 25 bps while leaving the Lending Facility unchanged suggests a preference for tightening liquidity conditions and improving the attractiveness of rupiah assets without resorting immediately to a higher policy rate. In our view, this asymmetric adjustment reflects BI’s attempt to strengthen external stability and retain foreign capital while preserving support for domestic credit growth.

In that sense, the asymmetric corridor adjustment may be viewed as a first line of defence, with a BI Rate hike remaining the next policy option should external pressures intensify further.

MSCI uncertainty raises the risk of further tightening

We maintain our call for a 25 bps BI Rate hike to 6.00% by end-2026, as the combination of rupiah weakness, elevated oil prices and tighter global financial conditions could require a stronger policy response. The key risk over the coming months is that the MSCI issue develops from an equity-market shock into a broader reassessment of Indonesia’s investability, triggering further foreign selling beyond the estimated USD 5 billion in potential passive outflows and spilling over into the rupiah and SBN market.

Even if the final reclassification decision is not due until 2027, uncertainty alone could keep foreign investors on the sidelines, limit the effectiveness of BI’s hedging incentives and push domestic yields higher. A rate hike could help contain currency pressure, but it would not resolve the underlying governance and market-transparency concerns; credible reforms and a sustained recovery in foreign flows will therefore be just as important as monetary tightening in stabilizing Indonesian financial markets.

KLBF-Still in Good Health with More to Give

KLBF-Still in Good Health with More to Give

Ervina Salim

PT Kalbe Farma Tbk

14 October 2025 - 07.45am

KLBF-Still in Good Health with More to Give

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