The High Cost of Stabilising the Rupiah
The pressure on the Rupiah has driven the US dollar exchange rate to around Rp 17,700 per US$1 as of 19 May 2026. This has led markets to anticipate Bank Indonesia would raise the policy rate at today’s Board of Governors meeting, on Wednesday 20 May 2026.
That option appears almost inevitable. As foreign capital flowed out heavily and the rupiah continued to weaken since February, interest rates have become the primary instrument for preserving exchange-rate stability.
The problem, though, is that such measures do not come for free. There is an economic price to be paid, and the burden ultimately falls on the public.
If we map the factors one by one, the pressures on the rupiah this time do not originate solely from domestic sources.
Global geopolitical conditions remain unsettled; the Strait of Hormuz remains closed, and oil prices are rising, all fuelling global investor concern.
Additionally, stock-market jitters follow MSCI’s removal of 18 Indonesian stocks from its global index, with FTSE set to evaluate shares with high ownership concentration.
Not to mention the fiscal deficit and policies deemed unfriendly to business.
It makes sense that international investors move their funds into safer assets such as US Treasuries.
Undoubtedly, this environment is challenging for Indonesia, as foreign funds rush out of the domestic market and back into safe-haven assets in advanced economies.
Bank Indonesia Governor Perry Warjiyo revealed that in Q1-2026 there were foreign outflows of Rp 26.06 trillion from the equity market and Rp 25.10 trillion from the government bond market.
The government and monetary authorities have not stood idle. Injecting around Rp 2 trillion per day into the bond market aims to stabilise bond prices from deep declines and to curb further foreign outflows.
This step is important to prevent the Dornbusch overshooting phenomenon, i.e., a situation where the exchange rate weakens too far and too quickly due to market panic.
The theory, introduced by economist Rudiger Dornbusch, likens it to a ship struck by a storm, where panicked passengers rush to one side of the vessel simultaneously, causing the ship to tilt far more than the waves’ strength.