Responding to Market Turmoil, BI Keeps Rupiah Stable

JAKARTA, KOMPAS – Bank Indonesia will maintain the stability of the rupiah exchange rate amidst volatile market dynamics following the tariff announcement by the United States government. Market intervention is considered an appropriate measure while continuing to strengthen foreign exchange reserves.

The Head of the Communication Department of Bank Indonesia (BI), Ramdan Denny Prakoso, through an official statement on Saturday (5/4/2025), conveyed that BI will continue to monitor developments in global and domestic financial markets following the tariff policy announcement by U.S. President Donald Trump on April 2, 2025.

"BI remains committed to maintaining the stability of the rupiah exchange rate, especially through optimizing the triple intervention instrument in order to ensure sufficient foreign exchange liquidity for banking and business needs and maintain market player confidence," he said.

In this case, the three interventions that will be undertaken by BI include the foreign exchange (forex) market in spot transactions, the domestic non-deliverable forward (DNDF) market, and by purchasing government securities (SBN) in the secondary market.

According to Denny, the global financial market has moved dynamically after the US tariff announcement followed by China's retaliation announcement on April 4, 2025. This is reflected in the weakening of the global stock market and the decline in the yield on US government bonds (US Treasury) to its lowest level since October 2024.

At the close of trading on April 4, 2025, the yield on U.S. government bonds with a 10-year maturity fell below 4 percent, even briefly reaching the level of 3.86 percent. Since its peak at approximately 4.75 percent on January 13, 2025, the yield on 10-year government bonds has tended to decline steadily.

On the other hand, major US stock indexes simultaneously recorded their deepest daily decline since 2020 at the market close, early morning WIB on April 4, 2025. Not only the US, stock indexes in the Asian market also weakened (Kompas.id, 4/4/2025).

Our obligation is to ensure that rising price levels do not become a problem of persistent inflation.

Meanwhile, the U.S. dollar index against other major currencies (DXY) briefly dropped to the level of 101.54, marking its lowest point throughout 2025. The exchange rates of several countries' currencies, including those of developing nations, strengthened against the U.S. dollar.

According to the Associated Press news agency, the Governor of the U.S. central bank Federal Reserve (The Fed), Jerome Powell, stated that U.S. tariff policies risk causing higher inflation and slower economic growth.

"Our obligation is to ensure that rising price levels do not become a problem of sustained inflation," said Powell in his remarks at a conference organized by the Society for Advancing Business Editing and Writing.

Instead of cutting rates in the near future, The Fed is most likely to maintain its benchmark interest rate at 4.3 percent in the coming months. With higher borrowing costs, inflation is expected to be more controlled.

Powell emphasized that the impact of U.S. tariff policies on the economy remains uncertain, prompting the Federal Reserve to maintain a neutral stance while awaiting further clarity. He also acknowledged that many business actors are postponing new investments until there is a clearer picture of the effects of these policies.

In the midst of this situation, the rupiah exchange rate in global spot trading moved above the level of Rp16,700 per US dollar. Citing Trading Economics data, the rupiah against the US dollar in trading on April 4, 2025 appreciated 0.4 percent to the level of Rp16,677 from the previous Rp16,745.

Senior Economist of PT Samuel Sekuritas Indonesia Fithra Faisal Hastiadi said that the rupiah is currently under pressure and is traded in the range of Rp16,800-17,000 per US dollar. Therefore, monetary intervention is needed so that the rupiah is stable in the range of Rp16,400 per US dollar.

Based on the results of the impulse response function (IRF) analysis, every 1 billion US dollars used from foreign exchange reserves is estimated to appreciate the rupiah by around 100 points. This means that to bring the rupiah appreciation up to 500 points, from Rp 16,900 per US dollar to Rp 16,400 per US dollar, requires funds of 5 billion US dollars.

"It is better to intervene, because the rupiah effect can be more psychological than technical. As long as BI does it with a surprise, because the shock effect or impulse will be more effective," he said when contacted from Jakarta.

If pressure on the rupiah exchange rate continues, it is possible that BI will take steps to increase the benchmark interest rate.

According to Fithra, foreign exchange intervention can be an effective tool to manage rupiah volatility in the short to medium term. There are two stages of the suggested strategy, namely intervention in the period of April and May 2025.

In April 2025, BI's intervention of 2-3 billion US dollars will be a strong signal to the market and maintain expectations and reduce speculative pressure. The next intervention step in May 2025, BI will inject 2 billion US dollars, while observing market developments, macroeconomic indicators, and capital flow behavior.

However, such interventions need to be balanced with strengthening foreign exchange reserves, either by securing bilateral or multilateral swap lines. This will provide additional confidence to the market while maintaining the central bank's ability to respond to future external shocks.

Data as of February 2025 shows that foreign exchange reserves were recorded at 154.5 billion US dollars. Although above the international adequacy standard of 3 months of imports, foreign exchange reserves fell by 2.6 billion US dollars, including for the payment of government foreign debt and stabilization of the rupiah.

"Although this intervention plan is based on empirical evidence, it must remain flexible and responsive to global market developments. If external risks such as trade wars heat up and escalate, BI must be ready to increase its intervention," Fithra said.

If pressure on the rupiah exchange rate continues, it is possible that BI will take steps by raising the benchmark interest rate. The increase is estimated at 25 basis points in the first half of 2025 with the consideration of maintaining exchange rate stability.

On the other hand, a lecturer at the Department of Economics, Andalas University, Syafruddin Karimi, argued that BI's intervention could indeed significantly restrain the rupiah's depreciation rate. However, this step should still be carried out in a measured manner and balanced with effective communication to the market.

"It's not just about whether the intervention funds are sufficient or not, but rather how the market perceives BI's capacity and credibility in managing external pressures," he said.

On the one hand, the 5 billion US dollars fund is indeed expected to make the rupiah appreciate 500 points to the level of Rp16,400 per US dollar. However, this does not mean that the move can immediately change market expectations. On the contrary, it would risk signaling a weakening of foreign exchange reserves which could worsen pressure on the exchange rate.