Bank Indonesia voted to keep the benchmark rate unchanged at 5.75% on Wednesday but narrowed the policy corridor by increasing the deposit facility rate. The decision to keep rates on hold despite recent MSCI-led volatility suggests that BI did not view recent rupiah pressures as sufficiently disruptive to require a rate response. Rather, the focus was on managing capital flow volatility and spurring credit growth through targeted measures, while preserving the domestic growth momentum.

Key highlights of the measures included a) hedging incentives were increased to boost inflows, i.e. the DNDF incentive was increased for 6M tenors to 40% (compared with 25% previously) and 12M to 45% (compared to 30% prev); BI put inflows from these hedging benefits at $9.9bn since these were introduced earlier in the quarter; b) policy corridor was narrowed with an increase in the deposit facility rate to 5% from 4.75%; this should not tighten overall lending conditions materially, but raises the return on excess liquidity and improves monetary transmission; c) the rupiah reserve requirement (GMW) will be reduced by ~200bp between Nov-Dec26, helping to ease liquidity conditions and foster stronger credit growth; d) Macroprudential Liquidity Incentive (KLM) cap will be cut from 6% to 5%.

Overall, these measures seek to attract foreign funding by lowering FX hedging costs, while also infusing more liquidity to safeguard credit growth. The concurrent increase in the deposit facility rate will, however, also influence the extent to which banks channel funds through the credit channel.

While we retain our call for one 25bp hike this quarter, the odds hinge on two pre-conditions - the IDR breaching fresh record lows against the dollar and/or a sharp deterioration in portfolio financing, reflected in thinning foreign inflows into government debt and SRBIs, which would push the balance of payments further into deficit.