There is a big possibility that the central bank of Indonesia (Bank Indonesia) will raise its benchmark interest rate (the 7-day Reverse Repo Rate) at the monthly policy meeting in May (scheduled for 16-17 May 2018). Bank Indonesia Governor Agus Martowardojo confirmed that Bank Indonesia is currently preparing "strict and consistent monetary policy measures, including the adjustment of the benchmark rate, as the central bank gives priority to market confidence and macroeconomic stability".

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The central bank of Indonesia (Bank Indonesia) announced that the nation's foreign exchange reserves stood at USD $124.9 billion at the end of April 2018, down from USD $126.0 billion one month earlier. This decline is in line with expectations as the central bank had already confirmed it is intervening in the market to defend the Indonesian rupiah amid broad-based US dollar strength.

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Indonesian stocks, the rupiah and bonds are all under heavy pressure on Tuesday (08/05). Indonesia's benchmark Jakarta Composite Index plunged 2.12 percent to 5,760.35 points in the first trading session of the day. This performance is in stark contrast to most Asian stocks that are trading in green territory today. Meanwhile, the Indonesian rupiah has slipped above the IDR 14,000 per US dollar level. Lets take a look why.

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Indonesia again led losses among Asian stock markets on Friday (04/05). The benchmark Jakarta Composite Index fell 1.13 percent to close at 5,792.35 points, its lowest position since August 2017. Most stocks in the Asia-Pacific region were in the red zone today as investors lack risk appetite ahead of the release of US payrolls data (due later today). Analysts expect to see a strong figure. Meanwhile, US unemployment is also expected to have eased slightly.

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In line with expectations the US Federal Reserve left its benchmark interest rate unchanged in the range of 1.50 - 1.75 percent at the two-day May policy meeting (1-2 May 2018). The US central bank also said it expects the recent rise in inflation (approaching the Fed's target) to be sustained, thus markets are increasingly expecting an interest rate hike at the next policy meeting (scheduled for 12-13 June).

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Indonesia Investments expects to see Bank Indonesia raising its benchmark interest rate at least once in 2018 in order to relieve pressures on the Indonesian rupiah. Rising expectations that the US Federal Reserve will implement four interest rate hikes in 2018, while the 10-year US treasury yield  passed beyond the 3 percent line, have resulted in major pressures on emerging market assets, including Indonesia's rupiah and stocks.

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Indonesia's Jakarta Composite Index continued to be plagued by a sell-off on Thursday (26/04) after already having fallen 2.40 percent on the preceding trading day. Today the benchmark index of Indonesia plunged another 2.81 percent to 5,909.20 points amid climbing US treasury yields (passing beyond the psychological boundary of three percent).

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Indonesian stocks and the rupiah remained under heavy pressure on Wednesday (25/04) after the benchmark ten-year US bond yields passed beyond the 3 percent level (for the first time since early 2014), thus lifting the US dollar and causing capital outflows from emerging markets. While most Asian stocks are trading in red territory today, Indonesian stocks are the most badly affected. The benchmark Jakarta Composite Index tumbled 2.40 percent to 6,079.85 points.

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The Indonesian rupiah is approaching the IDR 14,000 per US dollar level, the currency's weakest position since mid-December 2015. On Monday (23/04) the rupiah depreciated 0.59 percent to IDR 13,975 per US dollar (Bloomberg Dollar Index). Considering the fundamentals of the domestic economy are strong (despite some room for concern about Indonesia's widening current account deficit), it are external factors that put pressure on the rupiah.

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The Indonesian rupiah depreciated heavily against the US dollar on Friday (20/04) amid the release of positive US economic data, a rise in the benchmark 10-year US bond yields, while the US Federal Reserve may remain on track to push for monetary tightening as concerns about geopolitical trouble and a global trade war ease. Meanwhile, the start of the US earnings season was promising with 88 percent of released reports either meeting or exceeding consensus (so far about 15 percent of US companies have released their corporate earnings reports).

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The Indonesian rupiah exchange rate depreciated considerably on Wednesday (25/06) after Indonesia’s central bank (Bank Indonesia) said it would allow rupiah depreciation in an attempt to boost competitiveness of the country’s exports, while curbing imports. This strategy will have a positive impact on the country’s troubled trade balance. Based on the Bloomberg Dollar Index, the currency had weakened 0.67 percent to IDR 12,070 per US dollar by 14:30pm local Jakarta time.

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The performance of Indonesia’s benchmark stock index (known as Jakarta Composite Index or IHSG) was similar to the performance at the start of last week, possibly influenced by the presidential debates that took place a day prior to the past two Mondays. These debates, between the two presidential candidates (Joko Widodo and Prabowo Subianto), are broadcast live on national television and are important to outline each candidate’s vision and mission to the people. On 9 July 2014, Indonesians will vote for a new leader.

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The Indonesian rupiah exchange rate depreciated 0.62 percent to IDR 11,893 per US dollar on Tuesday (17/06), a four-month low. The main reason behind this poor performance is increased concern about the impact of violence in northern Iraq - namely higher global oil prices - on Indonesia’s trade and budget deficits as Indonesia subsidises a significant amount of domestic fuels). As oil and gas imports accounted for about 23 percent of total imports of Indonesia in April 2014.

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In the past week, the global crude oil price has increased considerably due to geopolitical tensions in Iraq which can disturb oil supplies from the Middle East. Up to the end of 2014, provided that no exceptional developments occur, the oil price is expected to range between USD $105-110 per barrel. Meanwhile, the Indonesian government announced that, despite the higher oil price putting pressure on the government’s budget balance, it will not increase prices of subsidized fuels this year.

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ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the May 2014 edition, a number of important topics that are monitored include Indonesia's inflation rate, the trade balance, the BI rate, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:

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As the market already expected that Indonesia’s benchmark interest rate (BI rate) would be kept at 7.50 percent in June 2014, the Indonesian rupiah exchange rate did not undergo any significant fluctuations on Friday’s trading day. Based on the Bloomberg Dollar Index, the currency had depreciated 0.05 percent to IDR 11,796 per US dollar by 16:25pm local Jakarta time. The US dollar had to cope with some pressures due to US retail sales (rising only +0.3 percent in May 2014) and weaker US jobless claims data.

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On Thursday 12 June 2014 it was decided at the central bank’s Board of Governors’ Meeting to maintain the country’s benchmark interest rate (BI rate) at 7.50 percent, with the Lending Facility rate and Deposit Facility rate held at 7.50 percent and 5.75 percent, respectively. This decision is consistent with ongoing efforts to steer inflation back towards its target corridor of 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce Indonesia’s current account deficit to a more sustainable level.

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Although at the end of Wednesday’s trading day (11/06) Indonesia’s benchmark stock index (known as the Jakarta Composite Index or IHSG) was up, the index had been moving in the red zone during most of the day. Moreover, the index did not get support from the Indonesia rupiah exchange rate nor did it get support from Asian stock indices which tended to decline after yesterday’s weakening indices on Wall Street. Fortunately, foreign investors recorded net buying, thus contributing to the 0.52 percent growth of the IHSG to 4,971.95 points.

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The Indonesian rupiah exchange rate appreciated slightly on Wednesday (11/06). According to the Bloomberg Dollar Index, the currency of Southeast Asia’s largest economy appreciated 0.04 percent to IDR 11,810 per US dollar. Reuters reported that the euro zone's monetary easing in combination with the recent improvement in China's economy offset the impact of higher US yields on Asia. However, investors are still waiting for several data, including the BI interest rate, the Eurozone’s industrial production, and US retail sales.

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Just as unexpected as yesterday when the benchmark stock index of Indonesia (known as Jakarta Composite Index or IHSG) fell 1.06 percent amid positive domestic and international circumstances, the IHSG made a surprise rebound on Tuesday’s trading day. Yesterday’s fall was exorbitant and unfounded and today market participants made up for that performance by accumulating stocks that had lost value. As a result the IHSG gained 1.25 percent to 4,946.09 points on Tuesday (10/06).

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