Indonesian Rupiah falls as fiscal and BI trade-off concerns weigh on sentiment

• Pressure persists on the Indonesian Rupiah as rising oil import costs fuel fiscal concerns and BI faces a currency-versus-growth trade-off.
• The threat of a downgrade to standalone market status by MSCI has prompted fresh Indonesian measures against stock manipulation.
• Further US Dollar upside is limited by expectations of a Fed rate pause and weaker immediate demand for geopolitical safe havens.

Pressure on the Indonesian Rupiah (IDR) keeps USD/IDR on an upward path for a fourth consecutive day, with the pair trading near 18,150 in Monday’s Asian session. As Indonesia is a net oil importer, elevated oil prices continue to stoke fiscal concerns and weigh on the currency. There is also growing concern that Bank Indonesia (BI) may have to make a difficult choice between protecting the Rupiah and supporting growth in the near term.

Following MSCI’s warning that opaque trading could lead to a downgrade, Indonesia announced additional steps on Monday to tackle stock market manipulation. These include bringing independent parties onto a committee that identifies stocks with concentrated ownership structures. Earlier this month, MSCI said Indonesia’s stock exchange could be relegated to "standalone" market status because efforts to curb coordinated trading practices had been insufficient.

How is Indonesia using lower reserve requirements to support liquidity?

A phased cut in banks’ reserve requirement ratios will add liquidity to the domestic system alongside Bank Indonesia’s latest policy decision, according to analysts at MUFG. They point out that “for conventional banks, the reserve requirement ratio will fall from 9% to 8% on 1 November and further to 7% on 1 December,” whereas “for sharia banks, the reserve requirement ratio will decline from 7.5% to 6.5% and subsequently to 5.5%.” In MUFG’s assessment, the measures selectively ease funding conditions, complementing BI’s wider policy mix without compromising its efforts to support the currency.

Expectations of an October interest rate pause by the Federal Reserve (Fed), followed potentially by another hike in December, may nevertheless weigh on the US Dollar (USD) and limit USD/IDR’s advance. The CME FedWatch Tool currently shows markets assigning a 90.6% probability to unchanged rates at the October 27–28 policy meeting and a 79.7% probability to a December hike.

Lower safe-haven demand is also weighing on the Greenback after US President Donald Trump ruled out immediate military action against Iran. According to Al Jazeera, he stated, “there will not be a strike today,” although markets remain concerned that strikes could resume after this week’s Israeli elections and next week’s US midterm elections. Reports indicate that Iran is ready to retaliate by targeting Israel and the UAE.

Why are different risks directing flows towards different safe havens?

The destination of safe-haven flows increasingly depends on the shock involved, according to strategists at OCBC. Their observation that “safe-haven demand is intensifying, but the beneficiaries differ by risk,” reflects their theme of “different shocks, different havens.” Concerns over AI-related growth are drawing investors towards the Japanese Yen, while Middle East tensions are supporting the Canadian Dollar and NOK. French fiscal stress, meanwhile, is bolstering the Swiss Franc, illustrating how each risk shapes investors’ choice of haven.