Economist says monetary instruments alone insufficient to stem rupiah depreciation
Economist Yusuf Rendy Manilet of the Center of Reform on Economics (CORE) said monetary instruments alone are insufficient to stem the rupiah’s depreciation, which has now hit a new record of around Rp17,800 per US dollar.
‘When relatively aggressive monetary instruments fail to reverse the exchange rate movement, the market is effectively saying the issue cannot be resolved by interest rates alone,’ Yusuf said.
The rupiah continued to weaken despite a 50-basis-point increase in the benchmark interest rate (BI-Rate) and higher yields on Bank Indonesia’s Indonesian Rupiah Securities (SRBI).
Yusuf noted this signals that current rupiah pressure is not primarily due to low domestic asset yields, meaning higher yields have limited impact.
He noted that the rupiah’s depreciation to around Rp17,800 per US dollar is largely driven by a combination of global and domestic factors.
Globally, investors are shifting to US dollars and safe-haven assets amid geopolitical tensions and high uncertainty. Domestically, the market perceives weakened fiscal credibility and declining confidence in consistent economic policies.
In the current climate, Yusuf said capital outflows are more influenced by global risk appetite than interest rate differentials. Thus, the 50-bps rate hike faces pressure far exceeding its own influence.
‘Interest rates remain important to curb margin pressures and maintain short-term stability, but their role is more of a temporary buffer than a primary cure,’ he said.
He added that foreign exchange interventions are still needed to dampen extreme volatility, but their effectiveness is limited as they deplete foreign reserves if sustained.
‘The market is not just waiting for additional steps from Bank Indonesia but expects a broader distribution of stabilisation responsibilities. This means strengthening domestic foreign exchange management and, more importantly, restoring fiscal credibility through consistent, technocratic policy-making,’ Yusuf explained.
He said the government must restore policy predictability, strengthen technocratic quality, and improve economic communication, which the market has found unconvincing.
‘This is crucial because foreign investors’ selling of rupiah assets is now more influenced by perceptions of policy direction than interest rates alone,’ Yusuf added.
Meanwhile, Yusuf urged strengthening domestic foreign exchange supply through more effective management of export earnings, including involving Danantara and state-owned enterprises (SOEs) in scheduled currency conversions during market pressure spikes.
Long-term, he said, Indonesia’s biggest challenge remains its balance of payments structure, which leaves the rupiah vulnerable to global shocks.
‘Dependence on commodities, persistent primary income deficits, and shallow financial markets are recurring sources of fragility. Until these structural issues are addressed, interest rate hikes will only temporarily delay the same pressures,’ Yusuf said.