Indonesia's Financial Markets Brace for H2 2026 Challenges Amidst Rupiah Weakness and Rate Hikes

Indonesia's financial markets are poised for a challenging second half of 2026, with investors grappling with a weakening rupiah, increased benchmark interest rates, and uncertainty surrounding government policies. Tae Yong Shim, Managing Director of PT Samuel Tumbuh Bersama, highlighted these obstacles, noting that market sentiment remains overshadowed by these combined pressures.

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Entering the second half of 2026, the market is still overshadowed by a combination of rupiah pressure, rising yields, and policy uncertainties.

The yield on 10-year government bonds has climbed by 108 basis points year-to-date, reaching 7.13 percent. Concurrently, Bank Indonesia has raised its benchmark interest rate by 100 basis points to 5.75 percent, signaling an upward trend in interest rates. Shim explained that the central bank's priority is stabilizing the rupiah, with the rate hikes intended to maintain its attractiveness. However, this comes at the cost of potentially restrained economic growth, creating a significant dilemma for the market.

The rupiah has seen a notable depreciation, falling approximately 7.1 percent against the US dollar since the beginning of the year, from 16,690 to 17,882 per dollar. This situation bears resemblance to conditions in 2018, when a similar increase in the BI rate led to rupiah depreciation. The Jakarta Composite Index (JCI) has also declined from 7,048 to 5,821.

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However, the consequence is that economic growth potentially remains restrained. This has become the main dilemma for the market, as stability needs to be maintained, but the growth space becomes more limited.

Shim further pointed to fiscal pressures and a widening state budget deficit, characterizing policy as increasingly reactive and lacking discipline. He also noted an inadequate system of checks and balances within the political and administrative framework. Despite these headwinds, the banking sector is showing relative resilience, though investors are advised to remain cautious regarding the impact of high interest rates, rupiah depreciation, and potential credit risks in the latter half of the year.

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The main issue is not only the increase in interest rates, but also the reasons behind the increase. When the market perceives that the interest rate hike is done to sacrifice growth for stability, investors will become more cautious about risky assets.