Bank Indonesia said on Tuesday it would keep intervening in currency markets and offer foreign investors cheaper hedges, as the rupiah closed at 18,145 per U.S. dollar, a few dozen points from the record low of 18,188 it touched last week.

The rupiah has become the main pressure gauge for a market already shaken by MSCI's warning that Indonesia could lose its emerging-market status. For fund managers in Singapore and Hong Kong who hold Indonesian government bonds, the currency often matters more than the coupon: a weaker rupiah can erase a year of carry in a few weeks. Bank Indonesia's answer, so far, is to intervene and subsidize hedging while holding its benchmark rate.

Governor Destry Damayanti set out the approach at a press conference of the Financial System Stability Committee, known by its Indonesian initials KSSK, held at the central bank's Thamrin headquarters in Jakarta, IDN Times reported. The committee groups the finance ministry, Bank Indonesia, the Financial Services Authority and the deposit insurance agency.

Bank Indonesia blames Middle East conflict and U.S. policy

The rupiah fell 0.11% on Tuesday, according to the figures Destry cited. On Oct. 28 it closed 0.17% weaker at 18,183 after hitting an all-time low of 18,188 during the session, IDN Times said. Destry noted that the currency had firmed in mid-September before the latest slide.

She attributed the weakness to outside forces: escalating geopolitical conflict in the Middle East, continued tight monetary policy in the United States and global investors' wariness toward emerging-market assets.

Regional trading told a mixed story on the day. A Reuters market report carried by The Star showed the rupiah firmer at 18,165 during Asian trading, as currencies moved unevenly ahead of the U.S. midterm elections and as a sharp fall in oil prices tempered the dollar's gains. The same report said Jakarta's benchmark stock index fell more than 3% and was down 43% for the year, the worst performance of any market in the world. Analysts at Bank of America wrote that recent central bank measures and MSCI's proposed downgrade had damaged confidence, according to Reuters.

The equity sell-off feeds the currency. Indonesian stocks lost 16.7% in October, their worst month since the March 2020 crash, and foreign selling of shares adds to dollar demand onshore.

The intervention toolkit and cheaper hedges

Destry described three lines of defense. The first is direct foreign exchange intervention: non-deliverable forwards sold in offshore markets, plus spot dealing and domestic non-deliverable forwards (DNDF) at home.

The second is subsidized hedging for foreign money. Bank Indonesia is cutting the premium it charges on DNDF hedges linked to foreign funding, which covers portfolio inflows, offshore borrowing by banks and foreign direct investment, by 40% for six-month contracts and 45% for 12-month contracts. On conventional buy-side hedging swaps with the central bank for the same purposes, the discount is 15% for three months, 20% for six months and 25% for 12 months.

The third targets trade settlement in partner currencies. The central bank is continuing incentives for local currency transactions, adding 10% to the premium on conventional sell-side hedging swaps and cutting the DNDF premium by 10% for trade and investment hedges, according to IDN Times.

The logic is to make it cheaper for a foreign bond buyer to lock in an exchange rate, so the investor stays in rupiah assets instead of selling them when the currency wobbles. It is a cheaper signal than a rate hike, but it puts more weight on Bank Indonesia's reserves and balance sheet.

Destry has repeated the message for a week. After a Danantara investment forum on Oct. 26, she told reporters the central bank remained in the market and had no plans to change its intervention strategy, describing the moves as normal market volatility, ANTARA reported. The rupiah fell 0.30% to 18,135 that day, after Brent crude for December delivery settled at US$116.72 a barrel on Oct. 24, its highest since late April.

Bank Indonesia held its benchmark BI-Rate at 5.75% at its Oct. 20-21 meeting while raising the deposit facility rate to 5%, according to the central bank's statement.

What investors are watching

Bond pressure has tracked the currency. Indonesia's 10-year yield reached 7.71%, a six-year high, as the rupiah tested 18,200 late last month.

The next markers come quickly. Statistics Indonesia is due to release third-quarter gross domestic product on Nov. 5. October foreign exchange reserves, when published, will show how much the bank has spent defending the 18,000 area. A close above 18,188 would set a fresh record low.