Indonesia Halves Dollar Purchase Limit to Defend Rupiah at 26-Year Low

Indonesia's central bank halved the limit on unbacked foreign currency purchases to $25,000 per person monthly, intensifying its fight to support a rupiah that has fallen roughly 4% this year to a 26-year low against the dollar.

"Our reserves are more than sufficient to stabilize the rupiah," Bank Indonesia Governor Perry Warjiyo said Tuesday, adding the currency is "undervalued and should strengthen moving forward."

The rupiah weakened to as low as 17,445 per dollar this week, its lowest since the Asian Financial Crisis in 1998, prompting the intervention. The currency gained 0.3% to 17,380 after the measures were announced. Year-to-date, Bank Indonesia has purchased Rp 123.1 trillion ($7.6 billion) of government bonds to support its currency.

The move aims to curb speculative dollar demand driven by rising oil prices, seasonal Hajj pilgrimage needs, and a strong U.S. dollar. However, with markets pricing in a higher-for-longer Federal Reserve and continued geopolitical risk, analysts question if the new rules can deliver more than temporary relief without further rate hikes.

A Seven-Point Strategy

The tighter FX purchase limit is the fifth and most direct measure in a seven-point stabilization plan President Prabowo Subianto endorsed this week. The previous cap was $50,000, itself lowered from $100,000 in April. The plan also includes intensified intervention in both onshore and offshore currency markets, and allowing domestic lenders to participate in non-deliverable forward markets to boost dollar supply.

"BI’s move to tighten the FX threshold further... aims to streamline demand for US dollars and ensure that purchases are backed by genuine underlying needs, rather than driven by speculative activity,” said Radhika Rao, an economist at DBS Bank Ltd.

To further bolster its defenses, the government is strengthening currency swap agreements with China, Japan, and South Korea, while preparing to issue bonds in foreign currencies like the Chinese yuan and Japanese yen to diversify financing, according to Coordinating Economic Minister Airlangga Hartarto.

Doubts on Effectiveness

Despite the multi-pronged approach, some analysts see the measures as a stopgap. Khoon Goh, head of Asia research at ANZ, noted the timing appears tied to reducing dollar demand for the upcoming Hajj pilgrimage. "This in itself is unlikely to turn things around for the rupiah, given continued concerns over the impact of high oil prices on Indonesia’s external and fiscal positions," Goh said.

The pressure on the rupiah reflects a broader trend affecting emerging market currencies, as the Federal Reserve holds interest rates, making the dollar more attractive. The iShares MSCI Indonesia ETF (EIDO), a key vehicle for U.S. investors, is down about 20% year-to-date, reflecting both the currency's slide and capital outflows.

For iFast Capital’s Kevin Khaw Khai Sheng, the central bank’s latest measures can buy time “and slow the bleeding,” but a meaningful rebound likely hinges on factors outside BI's control, such as U.S. rate cuts and a de-escalation of geopolitical tensions.

This article is for informational purposes only and does not constitute investment advice.