Indonesia’s rupiah defence strategy comes at cost of higher household burden

JAKARTA, June 13 — Indonesia’s decision to raise the BI-Rate and increase non-subsidised fuel prices within days highlights the government’s effort to support the rupiah and ease fiscal pressures, although the measures are expected to add pressure on households and businesses, analysts say.

University of Indonesia administrative science lecturer Dr Muhammad Ramaditya said the measures reflected efforts to address key vulnerabilities facing Southeast Asia’s largest economy, namely currency weakness and fiscal pressures.

“The primary objective of the 5.50 per cent rate is currency defence. By widening the yield differential against foreign assets, Indonesia becomes more attractive to global investors, while high-yielding domestic instruments such as Bank Indonesia Rupiah Securities and government bonds help attract capital inflows and support the rupiah,” he told Bernama.

Bank Indonesia (BI) on Tuesday raised the BI-Rate by 25 basis points to 5.50 per cent, citing the need to safeguard rupiah stability after the currency weakened beyond 18,000 per US dollar.

The rupiah has since recovered to around 17,900 per US dollar from levels above 18,000 earlier this week, suggesting the rate hike has helped improve market sentiment.

A day later, state-owned energy company Pertamina increased prices of non-subsidised fuels, with Pertamax (RON 92) rising to Rp16,250 (about RM3.64) per litre from Rp12,300 and Pertamax Green 95 to Rp17,000 (about RM3.81) from Rp12,900. Subsidised fuels, including Pertalite (RON 90) and Bio Solar, remained unchanged.

Ramaditya said maintaining rupiah stability was crucial as Indonesia remained dependent on imports of industrial raw materials, electronics and food commodities such as wheat and soybeans.

He said a weaker rupiah would raise the cost of imported goods and raw materials, potentially triggering broader inflationary pressures that could hurt consumers more severely than higher interest rates.

The economist also viewed the fuel price adjustment as a step towards reducing pressure on the state budget by allowing non-subsidised fuels such as RON 92 and RON 95 to move closer to market prices.

He said the policy would allow the government to preserve funds for targeted social assistance programmes, infrastructure development and subsidies for lower-income groups that depend on subsidised fuel.

However, Ramaditya acknowledged that the two policies could also create competing pressures on the economy, with higher fuel prices likely to increase transportation and logistics costs while higher borrowing costs could weigh on household spending and business activity.

Concerns over rising living costs were reflected in demonstrations by student groups in Central Jakarta on Friday, where protesters criticised several government economic policies, including the recent fuel price increase.

Meanwhile, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the BI-Rate increase was necessary after the rupiah weakened beyond 18,000 per US dollar, surpassing levels recorded during the 1997–1998 Asian financial crisis.

He said the move was aimed at preventing further depreciation of the rupiah, but noted that Indonesia’s situation was unique as investor confidence had also been influenced by perceptions that economic policies were becoming more interventionist and populist.

Mohd Afzanizam said concerns over governance and transparency had also affected sentiment among foreign investors, pointing to MSCI’s recent review of Indonesian-listed companies that resulted in several firms being removed from its benchmark index.

Taken together, the analysts said, the measures reflected efforts to stabilise the rupiah and manage fiscal pressures, although higher fuel and borrowing costs could weigh on household spending and business activity in the near term. — Bernama