BENGALURU (June 18): The Indonesian rupiah strengthened and shares in Jakarta held ground after the central bank hiked rates a second time in two weeks on Thursday, aiming to draw fresh inflows and stem pressure on the currency and broader local assets.
Bank Indonesia (BI) raised key interest rates to 5.75%, as expected, just a week after an off-cycle increase as policymakers continue their efforts to support the rupiah.
“We think it was necessary, as the pressure on the currency can come back after the hawkish FOMC meeting yesterday, and BI needs to increase rates to attract foreign inflows into Indonesian assets,” said Chandresh Jain, EM Asia rates and FX strategist at BNP Paribas.
“In the short term, the path (for IDR) may be difficult. The foreign inflows into bonds have been very small despite recent hikes, and a hawkish Fed can now push the US dollar higher, which in turn can push USDIDR higher.”
MSCI’s global market accessibility review, due early on Friday in Jakarta, will decide whether Indonesia keeps its “emerging market” status. A downgrade by MSCI could trigger more outflows, said Jain.
The rupiah is down about 6% this year, having pared some losses since last week’s surprise rate hike. Regardless, it remains one of the worst performing units in emerging Asia.
In the Philippines, the peso rose briefly to 60.40 before giving up gains and trading at 60.580 per US dollar. Equities likewise surrendered some gains, though they remained up about 0.6%. The Bangko Sentral ng Pilipinas (BSP) delivered its second straight rate increase of 25 basis points.
Equities at records; dollar weighs on currencies
Most emerging Asian equities rose, led by a 2.3% jump in South Korea’s benchmark to its first close above 9,000. This, along with record highs in Taiwan and Singapore, helped lift MSCI’s EM Asia index to a two-week peak.
Currencies, however, were pressured by a strong dollar, which hit a two-month high overnight, after the Fed held its benchmark rate but half of the policymakers projected a rate hike this year.
The Malaysian ringgit fell as much as 0.9% to 4.102 per dollar, its weakest since mid-December, while the South Korean won hit a one-week low of 1,530.9 a dollar.
Taiwan’s central bank is expected to hold rates steady later in the day, but inflation concerns could weigh looking ahead.
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