Rupiah Strengthens, Economist: Stability Still Requires Foreign Capital Inflows into Government Bonds

Trimegah Sekuritas Indonesia Chief Economist Fakhrul Fulvian believes the current stabilisation of the rupiah exchange rate still requires an increase in foreign capital inflows into Government Securities (SBN) to strengthen the balance in the foreign exchange market. “The rupiah is essentially waiting for larger capital inflows,” Fakhrul said in a statement in Jakarta. To generate sustainable capital inflows, Fakhrul believes the Indonesian bond market needs to offer yields that are sufficiently attractive compared to the still-high global risks. “Foreign investors are indeed starting to buy Indonesian bonds again, but in my view, this process is still in its early stages,” he added. Fakhrul assessed that the rupiah’s current depreciation should be seen as part of the financial market adjustment process, not as a reflection of deteriorating Indonesian economic fundamentals. According to him, Indonesia has now entered a stabilisation phase following various monetary policy adjustments and liquidity management undertaken by Bank Indonesia (BI). He also explained that the exchange rate stabilisation process does not happen instantly. Under current conditions, the bond market is the most decisive factor for the rupiah’s direction because it is the main entry point for foreign portfolio capital flows. Fakhrul considers BI’s move to tighten liquidity management as the right foundation. However, the success of the stabilisation process also requires consistency in fiscal policy and government debt management so that bond market normalisation can proceed optimally. According to him, coordination between BI and the Ministry of Finance is crucial at this stage. Both institutions need to provide room for the formation of bond yields that reflect market conditions so that Indonesia regains competitiveness compared to other emerging market countries. Fakhrul also believes that what is needed now is not additional intervention, but policy consistency. “When the market sees that the normalisation process is truly being carried out consistently by Bank Indonesia and the Ministry of Finance, investor confidence will increase, capital inflows will grow larger, and the rupiah will gain a much stronger foundation,” he added. During this process, according to Fakhrul, exchange rate volatility will still be influenced by global developments, especially expectations regarding the policy of the United States central bank, the Federal Reserve. However, from the domestic side, he said, the foundation for stabilisation is beginning to form and the downside potential for the rupiah is considered increasingly limited compared to a few months ago. Therefore, he believes the next challenge is no longer stopping the pressure on the rupiah, but building investor confidence that the bond market normalisation process will be carried out consistently until Indonesia once again becomes a primary destination for portfolio investment in the region. “When capital inflows strengthen again, the rupiah will gain much more solid support and the stabilisation process will become increasingly sustainable,” Fakhrul said.