Bank Indonesia expands monetary incentives as its preferred approach to defending rupiah stability, judging this strategy more effective than further benchmark rate hikes. The policy is expected to attract foreign capital inflows, deepen domestic financial markets, and continue supporting economic growth.
Why Bank Indonesia Expands Monetary Incentives Instead of Raising Rates Further
At the Board of Governors Meeting (RDG) held on July 21–22, 2026, BI decided to hold the BI-Rate at 5.75%. The Deposit Facility rate remained at 4.75%, and the Lending Facility rate stayed at 6.50%.
This decision followed a cumulative 100 basis point increase in the benchmark rate between May and June 2026. The BI-Rate rose from 4.75% to 5.25% in May 2026, then to 5.50% at the weekly RDG on June 9, 2026, before reaching 5.75% at the June 2026 RDG.
BI Governor Perry Warjiyo explained that policy focus has now shifted toward expanding monetary incentives to boost foreign portfolio investment inflows, strengthen rupiah exchange rate stability, and accelerate the deepening of the money market and foreign exchange market.
“This is more effective at controlling the exchange rate and, by extension, strengthening inflation control, driving economic growth, fiscal policy, and corporate health. Its effectiveness is higher than a 25 basis point rate hike,” Perry said during a virtual press conference following the RDG on Wednesday, July 22, 2026.
The Incentives Behind Why Bank Indonesia Expands Monetary Incentives
Perry detailed two main categories of incentives. The first targets foreign portfolio investors directly. BI raised the premium reduction incentive for Hedging Sell Swap transactions (Hedging Buy Swap to BI) from 10% to 12.5%, and expanded the incentive for Domestic Non-Deliverable Forward (DNDF) Hedging Sell transactions to 15%. This policy is expected to further boost foreign investor interest in placing funds in Indonesia’s financial markets.
The second incentive category aims to expand the use of Local Currency Transaction (LCT) schemes with partner countries, reducing reliance on the US dollar in trade and investment transactions. Under this policy, BI is providing an additional premium of 10% for Hedging Buy Swap transactions (Hedging Sell Swap to BI) and a 10% premium reduction for DNDF Hedging Sell transactions.
According to Perry, these incentives not only encourage greater use of LCT in international transactions but also strengthen liquidity and deepen the domestic foreign exchange market. This dual-pronged approach is central to how Bank Indonesia expands monetary incentives without relying solely on interest rate adjustments.
“This doesn’t just increase Local Currency Transaction usage, but also benefits our domestic foreign exchange market. With incentives for foreign portfolio investment inflows and greater use of Local Currency Transaction, our foreign exchange market will deepen further while also strengthening rupiah exchange rate stability,” Perry explained.
Looking ahead, BI plans to continue expanding these incentives to keep attracting foreign capital inflows and reinforcing rupiah stability. “Bank Indonesia believes the rupiah exchange rate will remain stable and tend to strengthen, supported by BI’s commitment through various rupiah stabilization measures, attractive yields, and Indonesia’s continued solid economic growth prospects,” he affirmed.
How the Rupiah Reacted Despite the Incentive Push
Despite the fact that Bank Indonesia expands monetary incentives to support the currency, the rupiah came under renewed pressure as markets digested BI’s decision to hold rates alongside escalating tensions in the Middle East. On Wednesday, July 22, 2026, the spot rupiah closed at Rp17,917 per US dollar, weakening 0.16% from the previous day’s close of Rp17,888. In line with this, the rupiah based on BI’s Jisdor rate closed flat at Rp17,909 per US dollar.
Currency and commodity analyst Ibrahim Assuaibi said that for Thursday’s trading session, July 23, 2026, the market would continue watching the direction of US Federal Reserve monetary policy. He noted that rising oil prices caused by supply disruptions in the Gulf region could push US inflation higher, increasing the likelihood that the Fed maintains elevated interest rates for longer.
“Prime Terminal data shows a 78% probability that the Fed will hold rates at next week’s meeting, while the probability of a rate hike in September stands around 68%,” he explained. Ibrahim projected the rupiah would trade within a range of Rp17,920 to Rp18,970 per US dollar on Thursday, July 23.
Domestic and External Factors Behind the Rupiah’s Weakness
Reviewing Wednesday’s decline, Ibrahim pointed to a mix of domestic and global sentiment. On the domestic front, markets responded to BI’s decision to hold the BI-Rate at 5.75% during the July 2026 RDG, alongside its unchanged Deposit Facility and Lending Facility rates.
According to Ibrahim, alongside the rate hold, BI is pushing other policies, namely providing incentives to encourage foreign capital flows into Indonesia’s money market to help maintain rupiah stability. This aligns closely with how Bank Indonesia expands monetary incentives as its preferred policy lever going forward. “BI is expanding incentive policies and other measures to increase foreign portfolio inflows and strengthen rupiah exchange rate stability, accelerate money market and foreign exchange market deepening, and improve liquidity,” Ibrahim said on Wednesday, July 22, 2026.
On the fiscal side, markets are also watching the State Budget (APBN) closely. As of the end of June 2026, the APBN recorded a deficit of Rp196.5 trillion, equivalent to 0.76% of GDP. Meanwhile, state revenue reached Rp1,459.4 trillion, or 46.3% of this year’s target, while state spending reached Rp1,656 trillion, or 43.1% of target. This shows government spending continues to outpace revenue, though the deficit has narrowed slightly compared to the same period last year.
On the external side, Ibrahim noted that rising geopolitical tensions in the Middle East remain the primary factor pressuring emerging market currencies, including the rupiah. He highlighted the ongoing escalation between the United States and Iran, with US forces reportedly striking Iranian military targets again, while Tehran launched retaliatory attacks on US military positions across the Middle East, including in Bahrain, Kuwait, and Jordan.
What This Means for Currency Exchange Planning
While Bank Indonesia expands monetary incentives as its primary tool for rupiah defense, the currency’s near-term path will likely continue to be shaped by external forces, Fed policy signals, Middle East developments, and fiscal dynamics, rather than domestic incentive measures alone. For individuals and businesses planning currency transactions, this points to continued volatility worth monitoring closely in the days ahead.
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Source: Investor Daily & Kontan
