Israel-Iran Conflict Risks Renewing Market Turmoil

JAKARTA, KOMPAS – The geopolitical conflict that has reignited following Israel's attack on Iran poses a risk of turmoil in the financial sector, particularly in the money and stock markets. The escalation of geopolitical tensions may also trigger the outflow of foreign capital from the domestic financial market.

Professor Telisa Aulia Falianty from the Faculty of Economics and Business at the University of Indonesia has warned that the war between Israel and Iran will have an impact on the financial sector. This is already evident from the increase in the Volatility Index (VIX), which reflects concerns about global risks.

"There has been a slight increase in the Volatility Index, but it is still under control. Later, if the Volatility Index increases, there will be concerns that the global risk channel will be increasingly transmitted to the financial sector," he said when contacted from Jakarta, Tuesday (6/17/2025).

In recent months, the Volatility Index has tended to remain within the range of level 18. Its movement began to peak at level 22 after Israel attacked Iran on Friday (13/6/2025) and has now returned to a range of level 19.

According to Telisa, the ripple effects of global geopolitical turmoil will be most quickly felt in the domestic financial sector, particularly in the exchange rate of the rupiah and the stock market. This situation also poses a risk of increasing the fiscal deficit in the state budget due to rising global oil prices.

At the close of the market on Tuesday (17/6/2025), the Composite Stock Price Index (IHSG) closed at the level of 7,155.85, an increase of 0.54 percent compared to the previous day's closing. However, the IHSG weakened slightly by 0.26 percent when compared to the market closing on Friday of last week.

We are concerned that the stock market, which has started to show positive signs, could turn negative again. There are worries at the global level and other transmissions that we are apprehensive about regarding fiscal matters.

On the other hand, the exchange rate of the rupiah in the Jakarta Interbank Spot Dollar Rate (Jisdor) during the same period closed at Rp 16,281 per US dollar. The rupiah has tended to move steadily within the range of Rp 16,200-16,300 since the market closed last week.

"We are concerned that the stock market, which has started to show positive signs, could turn negative again. There are global concerns and other transmissions that we worry could affect fiscal matters, namely the rise in oil prices, as it could increase our budget deficit," said Telisa.

In addition, he continued, the impact of the escalation of the war between Israel and Iran also poses a risk of affecting the outflow of foreign capital. This situation had previously occurred when U.S. President Donald Trump announced reciprocal tariff policies.

In line with this, the Chief Economist of Bank Permata, Josua Pardede, opined that the escalation of conflict between Israel and Iran has significant implications for the financial sector, particularly through the channels of global market volatility, inflation, as well as exchange rates and domestic bond yields.

Israel's attack on Iran has heightened geopolitical risks and the potential for supply disruptions, as reflected in the surge in global oil prices. On the other hand, the transmission of direct impacts to the financial markets is evident from the Volatility Index, which has reached a level of 22, the highest since the US-China trade war in April 2025.

“In conditions like this, global investors tend to look for safe-haven assets, driving the appreciation of the US dollar and increasing demand for gold,” said Josua.

The shift of investors who tend to place their investments in safe assets aka safe-haven is starting to be seen from the strengthening of the US Dollar Index (DXY) by 0.27 percent to 98.18. In addition, it is also seen from the increase in the yield on the 10-year US Treasury by 4 basis points to 4.4 percent on June 13, 2025.

Similar implications are also occurring in the Indonesian market, with the rupiah moderately depreciating by 0.37 percent to Rp 16,295 per US dollar. In line with this, the yield on Indonesian government bonds has also increased slightly by 4 basis points to 6.72 percent.

The main risk that needs to be anticipated in the domestic financial sector is the potential for further escalation that could trigger a surge in inflation through global oil price channels and a significant depreciation of the rupiah.

Josua explained that the strengthening of the exchange rate and the limited yields of government bonds indicate that domestic investors are anticipating potential global inflationary pressures and a delay in interest rate easing by Bank Indonesia (BI).

"The main risk that needs to be anticipated by the domestic financial sector is the potential for further escalation that could trigger a surge in inflation through global oil price channels and a significant depreciation of the rupiah, especially if the conflict becomes prolonged or intensifies, for instance, through the closure of the strategic Strait of Hormuz," he stated.

In addition, the persistent increase in global market risks can also lead to foreign capital outflows from the domestic market, weaken foreign exchange reserves, and raise the cost of government financing through bonds with higher yields.

Based on transaction data from June 10 to 12, 2025, foreign investors recorded a net purchase of Rp 5.20 trillion. This consists of a net purchase of Rp 0.83 trillion in the stock market and Rp 5.08 trillion in government securities (SBN), as well as a net sale of Rp 0.71 trillion in Bank Indonesia's Rupiah Securities (SRBI).

Overall, from the beginning of the year until June 12, 2025, non-residents recorded a net sale of Rp 15.45 trillion. This consists of a net sale of Rp 47.54 trillion in the stock market and Rp 21.82 trillion in SRBI, as well as a net purchase of Rp 53.91 trillion in the SBN market.

Therefore, the government and relevant financial authorities need to maintain monetary and fiscal flexibility to mitigate market volatility. For instance, Bank Indonesia should prepare measured intervention policies in the foreign exchange market to prevent excessive volatility of the rupiah.

On the other hand, the government needs to coordinate with BI to manage inflation expectations, particularly through the control of domestic energy prices. Clear and consistent policy communication is also essential to maintain investor confidence and ensure macroeconomic stability.