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Foreign Exchange Reserves Rebound, Rupiah Relieves Pressure, BI Remains Vigilant

Last week, Bank Indonesia announced a significant increase in the country’s foreign exchange reserves, which surged to 139 billion USD, up from the previous position of 136 billion USD. Previously, three scenarios were predicted regarding these reserves: the worst-case scenario at 133 billion USD, the baseline scenario at 135 billion USD, and the best-case scenario at 141 billion USD. The actual increase approached the best-case scenario.

One of the factors contributing to this rise in foreign exchange reserves was the issuance of Global Bonds and Samurai Bonds worth around 200 billion yen by the government. Additionally, other loan receipts also helped improve Indonesia’s international reserves.

Impact on Rupiah and Bank Indonesia’s Policy

With foreign exchange reserves reaching 139 billion USD, Bank Indonesia now has more leeway to intervene in the market. Bank Indonesia can conduct triple interventions in the spot market, bond market, and Domestic Non-Deliverable Forward (DNDF) market without having to raise interest rates. Although pressures on the rupiah still exist, especially from global sentiment influenced by the US Federal Reserve’s policies, a strong reserve position allows BI more flexibility in managing rupiah volatility.

It is hoped that with this condition, pressure on the rupiah can be reduced, and the exchange rate can remain at around 16,100 IDR/USD this month, although it may still fluctuate between 16,000 and 16,300 IDR/USD.

Challenges and Vigilance

However, Bank Indonesia must remain vigilant about several factors. Although inflation has eased and is at a fairly good level of 2.84%, slightly below the consensus of 2.97%, this is largely due to the shift in the harvest season which helped deflation in the food sector. On the other hand, there are indications of weakening domestic demand, reflected in the decline in the Consumer Confidence Index from 127 to 125 and deflation occurring in the financial sector.

From the supply side, the Purchasing Manager Index (PMI) in the manufacturing sector also showed a decline from 152.9 to 152.1, indicating pressure on production costs. The combination of declining demand and production suggests that achieving the economic growth target of 5% this year may be challenging.

Market Sentiment

Positive sentiment from strong foreign exchange reserves is expected to attract capital inflows back into Indonesia and ease selling pressure in the market. Analysts project the composite stock price index (IHSG) to be in the range of 6990 to 7060 with good rebound potential.

In the bond market, bullish sentiment is also visible with a trend of declining yields from 6.9% to 6.76% this week. Bonds with tenors of over 10 years show attractive capital gain potential.

This concludes this week’s market review from Samuel Sekuritas. See you next week for the next market review.