UOB’s Enrico Tanuwidjaja and Vincentius Ming Shen note that Indonesia’s FX reserves fell further in May as Bank Indonesia (BI) stepped up interventions to support the Rupiah, which has weakened sharply year-to-date. They expect FX reserves to stay under pressure as risk-off sentiment persists, with BI likely to keep tightening policy and using FX operations to defend USD/IDR stability.

Reserves fall as BI defends rupiah

"Foreign exchange (FX) reserves declined to USD 144.9bn in May, extending their downward trend from USD 146.2bn in April (see Indonesia: FX Reserves erosioncontinued to stabilize rupiah) and marking a notable fall from the December 2025 peak of USD 156.5bn (see Indonesia: Dec reserves jumped on sukuk issuance). The primary driver of this contraction remains unchanged—Bank Indonesia’s (BI) interventions to stabilize the rupiah amid significant depreciation, with the currency down 7.38% year-to-date and closing May at IDR 17,874/USD."

"Despite this drawdown, reserve levels remain fundamentally robust, with an import cover ratio of 5.6 months (or 5.5 months when accounting for government external debt servicing), well above the international adequacy benchmark of 3.0 months. BI emphasized that reserves will continue to underpin external resilience, supported by potential capital inflows following a shift toward a more contractionary monetary stance (see Indonesia: BI’s surprise rate hike marks the start of atightening cycle)."

"Looking ahead, FX reserves are expected to remain under pressure due to persistent risk-off sentiment towards the rupiah. To defend the currency, BI’s policy toolkit is expanding beyond direct FX intervention to include interest rate adjustments."

"We anticipate that the current tightening cycle will continue, with the benchmark rate rising to 6.00% by end-2026. Additionally, the government has continued to embark on issuing more foreign currency-denominated sovereign bonds to help bolster gross reserves, albeit at the well-recognized cost of increasing future debt burdens."

"All these are necessary measures to continue anchoring the stability of the exchange rate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)