Bank Indonesia (BI) Governor Perry Warjiyo decided to hold the benchmark BI-Rate at 5.75% during the July 21-22, 2026, meeting. This decision came despite pressures on the rupiah and followed previous rate hikes in May and June that saw the BI-Rate increase by 50 basis points (bps) and 25 bps respectively. The Deposit Facility rate remained at 4.75%, and the Lending Facility rate at 6.50%. This approach, according to Warjiyo, was more effective than a 25 bps rate hike in attracting foreign capital and stabilizing the rupiah without increasing domestic interest rates.
Instead of a rate hike, BI expanded its incentive policies for foreign portfolio investors. Key measures included increasing the incentive for hedging swap premiums from 10% to 12.5% and introducing a new 15% premium reduction for Domestic Non-Deliverable Forward (DNDF) instruments. These incentives aim to lower the hedging costs for foreign investors, making Indonesian assets like Sekuritas Rupiah Bank Indonesia (SRBI) and government bonds (SBN) more attractive. BI also hiked yields on SRBI, leading to a significant increase in non-resident ownership from Rp238.09 trillion to Rp288.65 trillion, or 27.11% of total SRBI, between June 15 and July 20, 2026.
Analysts are scrutinizing this non-conventional approach, as Deputy Governor Senior BI Destry Damayanti noted it is targeted at drawing in "fresh money." She highlighted that SRBI yields, currently around 7.6% for a one-year tenor, have stabilized, suggesting they have peaked. Therefore, BI is relying on these incentives to maintain capital inflows without further rate increases. The central bank also expanded incentives for Local Currency Transaction (LCT) programs, offering 10% swap and DNDF hedging incentives, to reduce reliance on the U.S. dollar and deepen domestic foreign exchange markets.
The decision comes amidst global uncertainties, including a weakening rupiah attributed to rising Middle East conflicts and expectations of U.S. Federal Reserve rate hikes, with the rupiah briefly touching Rp18,000 per dollar before strengthening to Rp17,885 per dollar by July 21, 2026. BI believes these measures will ensure rupiah stability, supported by attractive yields and a positive economic outlook, and will continue to expand incentives to draw foreign capital and strengthen the rupiah's stability without domestic interest rate hikes.
