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Bank Indonesia left the policy rate unchanged at 5.75% yesterday, along expectations. Acting Governor Destry maintained a neutral bias but highlighted global risks. A firm 2Q domestic growth report and recent stability in the rupiah backed BI's decision to leave the benchmark rate on hold. Policy risks, at this juncture, are more external focused as the currency and bond market remain susceptible to geopolitical developments on elevated global oil as well as crack spreads, besides DM yields. Domestic catalysts have turned constructive after the government reinforced its growth-supportive focus for 2027, while maintaining fiscal consolidation (our note). We expect a rate pause in Sept, while maintaining one insurance hike in 4Q26 if financial conditions and sentiments weaken. Few changes were made to the measures announced in July, including an extension of the hedging discount to include FDI and foreign borrowings by domestic banks, in addition to portfolio investors. Add to this, a flexible rollover mechanism has been introduced to extend swaps based on the remaining life of underlying assets, subject to pre-conditions.
Across the ocean, RBI minutes from the early-August policy meeting, released late Wednesday, were more cautious than the Governor's messaging at the rate review (see note). Statements in the minutes pointed to four members preferring a neutral-to-cautious view, while Deputy Governor Gupta struck a firmer tone putting to bed rate cut expectations and Governor backed a pause but saw a need for broad-based policy tightening moves if inflation quickens here on. Besides highlighting early signs of cost pressures seeping into categories, members viewed the inflation outlook as conditional on the monsoon outcome, El Niño risks, and geopolitical developments. With inflation expected to average well over 5% in second half of FY27, investors might price in potential tightening risks in the run-up. Onshore markets’ price action is meanwhile likely to be more influenced by energy prices and US rate movements, with USDINR’s attempts to break above 96.0 attracting strong counter presence. Despite these moves, rupee 1M volatility has largely moderated this month, after peaking in June. Calming effect on US long-end rates (post buybacks) should relieve pressure on the backend of the regional rate curves. 
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