Safeguarding the Rupiah, Safeguarding Growth

After several days of strengthening following Bank Indonesia’s decision to raise the BI-rate to 5.75%, the Rupiah exchange rate against the US Dollar has weakened again to around Rp17,950. This raises the question of whether Bank Indonesia has been sufficiently aggressive in implementing its monetary policy. However, I believe a more important question exists: are we attempting to treat the cause of the problem, or merely alleviating the symptoms?

In recent months, Bank Indonesia has taken various steps. Interest rates have been raised, the yields on Bank Indonesia Rupiah Securities have been made more attractive, and various monetary instruments have been utilised to maintain Rupiah stability. These policies are being implemented amidst an unfavourable global situation. The strengthening of the US Dollar, geopolitical uncertainty, and shifts in the policy directions of major central banks have indeed placed significant pressure on almost all emerging markets.

While these various measures have succeeded in mitigating pressure in the short term and maintaining market confidence, the weakening of the Rupiah has not truly ceased. We need the courage to look at the more fundamental issues. Because if the Rupiah continues to require ‘painkillers’ in the form of increasingly high interest rates, perhaps the primary problem no longer lies within the realm of monetary policy.

Exchange rates are ultimately determined by the supply and demand of foreign exchange. When the demand for Dollars grows faster than a country’s ability to generate Dollars, pressure on the domestic currency is almost unavoidable. In such conditions, raising interest rates can indeed slow down the depreciation. However, it does not change the root problem. The pressure on the Rupthal today more reflects Indonesia’s structural economic issues.

Structural Issues

So, what are the structural issues in question? This is where the discussion of exchange rates can no longer be explained solely through monetary policy.

Indonesia’s economic structure still relies heavily on imports of raw materials, capital goods, and energy. On the other hand, the increase in value-added exports has not yet been able to offset the continuously increasing need for foreign exchange.

Foreign Direct Investment (FDI) has also not grown as strongly as expected, and has even tended to weaken since the third quarter of 2025. Furthermore, some domestic funds are already seeking investment opportunities abroad. All these conditions cause the demand for the US Dollar to far exceed its supply, resulting in continuous pressure on the Rupiah.

This means we are facing a problem regarding the economic capacity to generate foreign exchange sustainably. Such problems cannot be solved through monetary instruments alone, let alone by relying solely on interest rate hikes.

Consequences of Monetary Policy

Monetary policy always carries consequences. The higher the yield on Bank Indonesia instruments, the greater the funds absorbed by the central bank. For the banking sector, these instruments become an attractive option as they provide competitive yields with very low risk. Consequently, liquidity becomes tighter and the incentive to provide productive credit also decreases.

This dilemma must be managed carefully. We must ensure that policies to maintain exchange rate stability are implemented alongside the maintenance of economic growth. Therefore, policies intended to protect the Rupiah should not narrow the financing space for the real sector.

Thus, I view Indonesia’s challenge today not as a choice between stability or growth. The challenge is to ensure that both can proceed hand in hand.

Importance of Policy Synergy

To achieve stability and growth, Bank Indonesia and the Government need to synergise. Bank Indonesia must remain focused on maintaining monetary stability and controlling market expectations. At the same time, the government also needs to accelerate structural reforms that truly increase the national economic capacity to generate foreign exchange.

Hilirisasi (downstreaming) must produce greater added value, rather than merely relocating processing sites. Investment needs to be directed towards sectors that strengthen national industry and create quality employment. Foreign exchange from exports must circulate more within the country. Export-oriented manufacturing must also return to being one of the main engines of economic growth.

In other words, the strength of the Rupiah cannot depend on portfolio capital flows that are highly sensitive to changes in global sentiment. Indonesia needs a more permanent source of strength: productivity, quality investment, and value-added exports.

I believe Indonesia possesses all the prerequisites to achieve higher growth. Our economic fundamentals are relatively good, fiscal space is maintained, inflation remains controlled, and the potential of the domestic market is immense. All these foundations must be accompanied by the courage to undertake structural improvements.

Indonesia’s policy challenge is not actually choosing between exchange rate stability or economic growth, but rather shifting the source of the Rupiah’s strength from a dependence on portfolio capital flows—which are sensitive to interest rate changes—towards a more permanent supply of foreign exchange through value-added exports, quality FDI, and an external transaction surplus. As long as this structural transformation is not achieved, monetary policy will continue to be forced to work harder than necessary, while fiscal policy and the real sector have not yet fully taken up their role as strengtheners of exchange rate fundamentals.

A strong Rupiah is not born solely from high interest rates. The Rupiah will be truly strong when supported by an economy capable of generating foreign exchange sustainably. That is our homework. Not only to maintain stability today, but also to build resilience.