Indonesian Rupiah Falls as Fiscal Concerns and BI Policy Trade-offs Weigh

• Higher oil import costs fuel fiscal concerns, weighing on the Indonesian Rupiah as BI faces difficult choices over growth.
• Following MSCI’s warning of a possible downgrade to standalone market status, Indonesia unveils further measures against stock manipulation.
• Further US Dollar gains are limited by expectations of a Fed rate pause and weaker immediate demand for geopolitical safe havens.

At around 18,150 during Monday’s Asian session, USD/IDR is advancing for a fourth consecutive day. Persistent fiscal worries linked to higher oil prices are weighing on the Indonesian Rupiah (IDR), reflecting Indonesia’s position as a net oil importer. There are also growing concerns that Bank Indonesia (BI) may have to make a difficult choice between supporting the currency and sustaining near-term growth.

Following MSCI’s warning that opaque trading could lead to a market downgrade, Indonesia announced further 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 downgraded to "standalone" market status, arguing that efforts to curb coordinated trading practices had been insufficient.

Indonesia lowers reserve requirements to support liquidity

A phased cut in banks’ reserve requirement ratios will add domestic liquidity alongside Bank Indonesia’s latest policy decision, according to analysts at MUFG. They explain that “for conventional banks, the reserve requirement ratio will fall from 9% to 8% on 1 November and further to 7% on 1 December,” while “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 provide targeted relief to funding conditions, complementing BI’s wider policy mix without compromising its objectives for currency support.

Expectations that the Federal Reserve (Fed) will leave interest rates unchanged in October, before potentially raising them again in December, could nevertheless weigh on the US Dollar (USD) and limit gains in USD/IDR. The CME FedWatch Tool currently puts the market-implied probability of a pause at the October 27–28 policy meeting at 90.6%, with a 79.7% chance of a December rate increase.

Reduced safe-haven demand is also putting pressure on the Greenback after US President Donald Trump ruled out immediate military action against Iran. According to Al Jazeera, he said, “there will not be a strike today,” although markets remain uneasy about the prospect of renewed strikes after this week’s Israeli elections and next week’s US midterm elections. Reports suggest Iran is ready to retaliate by targeting Israel and the UAE.

Safe-haven flows diverge as investors respond to distinct risks

The source of each shock is increasingly shaping investors’ choice of safe haven, 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.” They identify AI-related growth worries as a driver of flows into the Japanese Yen, while Middle East tensions are supporting the Canadian Dollar and NOK. French fiscal pressures, by contrast, are underpinning the Swiss Franc.