Why Indonesia must be very vigilant about rupiah weakness

Even if it's BI's preferred method.

According to DBS, the central bank (BI) has refrained from hiking either the policy rate or the FASBI deposit rate at the latest monetary policy meeting last week.

Notably, this stance was taken even though headline inflation has already pushed past BI’s target range of 3.5-5.5% with a 5.9% YoY print in March. Several things can be
taken away from recent statements from the BI.

Here's more from DBS:

Firstly, the authorities appears to be comfortable with the rupiah hovering at around IDR 9700/USD. Clearly, rupiah weakness (as opposed to interest rate hikes) was the preferred method that BI has taken to address the widening current account deficit.

However, rupiah weakness can stoke imported inflation and further depreciation from current levels may not be desirable. Secondly, BI has downgraded its GDP growth forecast range for this year to 6.2%-6.6%, down from 6.3%-6.8%. Growth momentum has slowed just a notch over the past several months. Judging from capital goods imports, investment growth is likely to have moderated from the stellar levels of last year.

This could explain BI’s reluctance in hiking rates. With an eye on external stability and ongoing price pressures, some tightening is needed. BI is considering using term deposits to further absorb liquidity in the financial system. If sufficient liquidity is mopped up, interbank rates would rise and lead to tighter monetary conditions.

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