Indonesia’s foreign exchange reserves fell to USD 144.9bn in May from USD 146.2bn in April, extending the slide from the December 2025 peak of USD 156.5bn as Bank Indonesia intervened to stabilise the rupiah. The currency was down 7.38% year-to-date and ended May at IDR 17,874 per US dollar, keeping demand for FX operations elevated.
Even after the drawdown, reserves equated to 5.6 months of imports, or 5.5 months including government external debt servicing, remaining above the 3.0-month adequacy benchmark. The policy framework cited includes a shift to a more contractionary monetary stance and the use of interest rate adjustments alongside intervention, with a benchmark rate forecast at 6.00% by end-2026, while the government has also been issuing more foreign currency-denominated sovereign bonds to support gross reserves.
Rupiah Under Pressure and Policy Response
We see the Indonesian Rupiah facing continued pressure from a strong US dollar, which is being propped up by the Federal Reserve’s persistent “higher-for-longer” interest rate stance. Bank Indonesia’s significant interventions, which have drawn down foreign exchange reserves to USD 144.9 billion, signal their strong commitment to currency stability. This active defense of the Rupiah creates specific opportunities for derivative traders in the coming weeks.
The expectation for Bank Indonesia to keep raising its benchmark rate towards 6.00% is a central theme for our strategy. With Indonesia’s latest inflation data holding firm above the central bank’s target at 4.2% year-over-year, BI has both a domestic and external mandate to tighten policy. We believe positioning for higher short-term rates through instruments like interest rate swaps could be a prudent move.
Outlook and Trading Strategies
We anticipate heightened volatility in the USD/IDR pair as the market tests BI’s resolve. One-month implied volatility is currently elevated near 9.5%, reflecting this uncertainty and making option strategies particularly attractive. This environment suggests that buying option structures, such as straddles, could be beneficial to capture a significant price move in either direction.
While the path of least resistance for the Rupiah appears weaker, BI’s past actions, like during the 2018 emerging market sell-off, show they can temporarily halt depreciation. Therefore, instead of simple spot positions, using USD/IDR non-deliverable forwards (NDFs) allows for targeted bets on further weakness. Alternatively, we are considering risk reversals to position for a higher USD/IDR exchange rate at a lower upfront cost.
