MSCI risk weighs on Indonesian Rupiah as BI keeps rates on hold – BBH

Bank Indonesia held its policy rate at 5.75% for a fourth meeting, while IDR edged lower following MSCI’s downgrade consultation, according to Elias Haddad at Brown Brothers Harriman. Although BI anticipates a wider current account deficit by 2026 and consequently greater external funding needs, its ample FX reserves are viewed as a buffer against further Indonesian Rupiah weakness.

External risks weigh on Rupiah

"IDR weakened slightly. Bank Indonesia (BI) kept rates on hold at 5.75% for a fourth straight meeting. Markets were split, with some expecting a hike to support the currency after MSCI’s surprise downgrade warning last week heightened the risk of capital outflow."

"BI projects Indonesia’s current account deficit (1% of GDP in Q2) to widen to be between 1.6% and 2.4% of GDP in 2026. That raises external funding needs just as MSCI downgrade risks threaten capital outflows, keeping IDR under downside pressure."

"Still, BI’s ample FX reserves provide scope to cushion IDR weakness, particularly against a relatively modest spot turnover of around $7bn a day. BI FX reserves totaled $125bn in September (8.4% of GDP)."

"As a background, MSCI announced the launch of a consultation on a proposal to reclassify Indonesia’s stock index from Emerging Market to Standalone Market status, bypassing Frontier Market classification. MSCI will announce its final decision by the end of June 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)