Being Friends with the Market

Investment instruments in Indonesia’s financial system remain limited, liquidity depth is inadequate, and the variety of financial products has not been able to optimally absorb the dynamics of global capital flows. In such conditions, even small external shocks can quickly spread domestically, affecting exchange rates, interest rates, and economic agents’ expectations simultaneously.

This market shallowness becomes even more crucial when linked to Indonesia’s external defence capacity, particularly foreign exchange reserves. Compared to other countries in the region, Indonesia’s position is relatively non-dominant and lags behind.

China has very large foreign exchange reserves (over US$3 trillion), providing ample room for manoeuvre in maintaining exchange rate stability. Thailand also has a solid buffer with reserves exceeding US$280 billion. Even Vietnam has shown significant improvements in reserve capacity in recent years.

In this landscape, Indonesia is not in a position that allows reliance solely on a conservative approach in monetary communication.

This means Bank Indonesia can no longer speak to the market in a one-way tone, as if the regulator is giving instructions to the regulated entity. Such an approach may be relevant in deep, liquid markets with many players. However, in the Indonesian context, it risks creating a psychological distance between the monetary authority and market participants.

What is needed in the current financial and monetary system is a repositioning of institutional relationships from a ‘regulator and regulated’ dynamic to a ‘friendly’ partnership. Why is this approach relevant, even urgent?

Because the structure of both global and domestic foreign exchange markets is highly concentrated. In the offshore market, exchange rate directions are not determined by thousands of dispersed players, but by a handful of large institutions. Names like JPMorgan Chase (11.41% market share), UBS (10.02%), Deutsche Bank (8.49%), and XTX Markets (6.69%) have significant influence in shaping expectations and currency movements.

In the domestic onshore market, this structure is even more concentrated. Domestic foreign exchange transactions are dominated by a few large banks such as Bank Central Asia (BCA), Bank Mandiri, and Bank Negara Indonesia (BNI). This limited number of players should be a strategic opportunity for Bank Indonesia to build more intensive, personal, and trust-based communication.

However, this is where the main challenge emerges: credibility. In recent times, risk indicators have shown increasing uncertainty that cannot be ignored.

Indonesia’s Credit Default Swap (CDS) has risen not only since the escalation of the Middle East conflict, including tensions related to Iran, but has been increasing since mid-2025. The rise in CDS is a very clear signal that the market perceives heightened risks, both from global factors and perceptions of domestic conditions.

The problem is that the market does not hold this perception alone. It is translated into expectations, and expectations are then realised in investment decisions. When uncertainty increases, market participants tend to make portfolio adjustments that, in many cases, mean capital outflows. These outflows ultimately pressure the rupiah exchange rate, creating additional strain on macroeconomic stability.

In such situations, conventional monetary instruments alone are not enough. Market interventions, liquidity management, or interest rate adjustments are important, but there is one instrument that often proves more decisive: communication.

Monetary communication is not merely the conveyance of policy information. It is a tool for shaping expectations, and in shallow and concentrated markets, expectations can shift very quickly, either towards stability or the opposite.

Therefore, a rigid, formal, and distant communication approach must be abandoned. Bank Indonesia needs to build dialogue-based communication, not monologue. A friendly approach means understanding how the market thinks, what they are worried about, and how they read policy signals.

Being friends with the market does not mean sacrificing and eliminating independence, or submitting to the market. This is not about surrendering policy sovereignty to financial players. On the contrary, it is a strategy to ensure that policies taken are properly understood, trusted, and responded to constructively by the market.

In practice, this approach can be implemented through several measures. First, sharper transparency. Not just one-way communication, but speaking from the heart accompanied by clear and consistent messages.

Second, more intensive engagement with key market players, both offshore and onshore. Third, the ability to manage the narrative that policies taken are not reactive, but part of a credible strategic framework.

This is where the art of monetary policy is tested. When fiscal space is limited, financial markets are shallow, and external pressures increase, trust becomes the most valuable currency. And trust is not built just with numbers, but with appropriate and effective communication.

Indonesia does not have the luxury of being rigid. With relatively limited foreign exchange reserves and a concentrated market structure, a conservative approach relying on ‘institutional distance’ could become a new source of instability.

It is time for Bank Indonesia to change the way it interacts with the market. No longer as a regulator standing in an ivory tower, but as a strategic partner present amid market dynamics.

Because ultimately, stability is not just about the right policies, but also about how those policies are understood and trusted.