Indonesia’s economy is set for a cyclical rebound, driven by expansionary macroeconomic policies. Fiscal measures are projected to have more influence as the chance for additional monetary easing reduces.<\/p>\n
A report forecasts a 25 basis point rate cut by Bank Indonesia to 4.5% in the first quarter. However, there is caution regarding the Indonesian Rupiah due to fiscal risks and geopolitical issues.<\/p>\n
The possibility of altering the budget deficit cap has increased, linked to a higher anticipated deficit in 2025 and its inclusion in a parliamentary priority programme. Bank Indonesia is expected to maintain an accommodating approach to support this economic strategy.<\/p>\n
These dynamics suggest a cautious outlook for the Indonesian Rupiah. Concerns stem from fiscal and geopolitical elements impacting its stability.<\/p>\n
Given the expectation for a cyclical rebound, we believe the upcoming Bank Indonesia rate cut is a key event to trade. An accommodative stance from the central bank, with a 25 basis point cut anticipated this quarter, supports a bullish view on Indonesian equities. We see value in buying call options on the Jakarta Composite Index (JCI), which has been consolidating after a mixed performance in 2025.<\/p>\n
However, we must balance this with the significant fiscal risks weighing on the currency. After seeing the budget deficit widen through 2025 to fund new programs, talk of removing the legal 3% of GDP deficit cap is creating uncertainty. We therefore suggest purchasing USD\/IDR call options or non-deliverable forwards to protect against potential Rupiah depreciation.<\/p>\n
The divergence between a positive equity outlook and a cautious currency view suggests rising volatility. In 2025, we saw the Rupiah weaken past 16,200 per dollar during periods of global risk aversion, and the current domestic fiscal concerns could trigger similar moves. This environment makes long volatility strategies using options attractive, as market uncertainty around the deficit cap grows.<\/p>\n
Interest rate traders should also note the shift from monetary to fiscal stimulus. With this expected to be the last rate cut in the current cycle, positioning through interest rate swaps to receive a fixed rate seems prudent. This move would capitalize on the final drop in short-term rates before the government’s fiscal expansion becomes the main driver of the economy.<\/p>\n
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