Indonesia Tightens Global Banks' FX Trading to Bolster Rupiah

Bank Indonesia (BI), the central bank of Indonesia, has intensified its oversight of foreign exchange (FX) transactions conducted by major Wall Street lenders and local financial institutions. This move is part of a broader effort to counteract the depreciation of the Indonesian rupiah against the U.S. dollar and bolster Southeast Asia’s largest economy. The central bank's actions are aimed at curbing speculative activities and maintaining stability within the currency market.

Officials from Bank Indonesia are actively monitoring dealing rooms and making direct phone calls to banks for large dollar purchases to ascertain the underlying reasons for transactions and client details. Banks are now prohibited from holding long dollar positions or engaging in speculative bets. Discussions between BI and the Indonesia Association of International Banks accelerated after the rupiah plunged to record lows in early June. In April, BI tightened FX regulations by lowering the threshold for foreign exchange purchases requiring supporting documents from US$100,000 to US$50,000 per buyer per month. This was further reduced in May, cutting cash purchases without supporting documents to US$25,000. Additionally, a new rule regarding foreign exchange export earnings from the natural resources sector came into effect on June 1, mandating that these earnings be held in state-owned banks, with no more than 50% converted into rupiah. BI Governor Perry Warjiyo informed bank chiefs that the central bank is monitoring seven lenders with high volumes of foreign exchange trading.

The rupiah has been one of Asia's worst-performing currencies this year, declining approximately 8% to 9% against the U.S. dollar year-to-date. It touched a record low of 18,190 per US dollar in early June. To shore up the currency, Bank Indonesia conducted a surprise 25-basis-point interest rate hike in early June, raising its benchmark rate to 5.50%, following a 50-basis-point increase in May. The currency saw a slight recovery after the rate hike, strengthening to levels such as 18,085 or 18,030.5. Indonesia's benchmark stock index has also experienced significant declines during this period. Furthermore, the central bank's interventions to defend the rupiah led to a US$1.3 billion drop in foreign exchange reserves in May, bringing the total to US$144.9 billion, and a cumulative US$12 billion decrease in 2026.

These tightened oversight and monetary policy measures come amidst broader concerns over President Prabowo Subianto's economic policies and global market uncertainties exacerbated by the conflict in Iran. Prabowo's ambitious agenda, aiming for 8% annual growth, includes increasing the state's role in the economy, implementing costly populist policies like a US$15 billion free school meals program, and injecting billions of dollars into sovereign wealth funds such as Danantara. These plans are raising concerns about the strain on the state budget and increased state control over the private sector. Plans to centralize commodity exports through a state-run agency are also unsettling investors. High oil prices, a consequence of the Iran conflict, are placing additional pressure on energy-importing nations like Indonesia. Other Asian central banks, including those in South Korea, the Philippines, and India, are similarly stepping up oversight of offshore currency derivatives and intervening in their respective markets.

Analysts remain skeptical that these measures alone will be sufficient to reverse the rupiah's downward trend, emphasizing the need for a fundamental shift in economic conditions. Concerns persist regarding the impact of high oil prices on Indonesia's external and fiscal positions. Bank Indonesia aims to counter this by increasing yields and attracting foreign portfolio investment inflows. To this end, the central bank plans to raise yields on Rupiah Securities (SRBI), reduce hedging swap costs for foreign investors by 10%, and reopen repo auction facilities for banks.