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Pullback in benchmark oil prices helped to stabilise INR asset markets, though overnight climb in US yields might counteract some of the positive impact. USD/INR had ended around the mid-95 handle, though is set to resume its climb, attracting strong intervention bids. Liquidity conditions have tightened meaningfully following the central bank's sustained absorption operations, which have relied on a mix of open market operations, VRRR auctions, and short-tenor sell-buy swaps. Tax outflows, rising seasonal currency leakage, and intermittent FX sales likely helped further lower the surfeit. As a result, the liquidity balance narrowed to below INR5tn earlier this week from a peak of around INR10-11tn, helping to improve monetary policy transmission and align the weighted average call rate more closely with the repo rate. Liquidity and core inflation have historically displayed a modest positive relationship. As such, the RBI's inflation mandate has likely reinforced the push to drain excess liquidity, with the odds of a rate hike at the October meeting on the rise. Short-end rates are likely to stay bid as markets price in these rate increases.
Bank Indonesia left the rates unchanged, along expectations. While tighter global financial conditions, and geopolitical risks were as key risks on the horizon, domestic GDP forecast was held at 4.9-5.7% (DBSf: 5.3%) alongside manageable inflation, notwithstanding El-Nino related risks. Contained inflation expectations had reduced the urgency for BI to tighten policy further, allowing policymakers to prioritise growth and financial stability considerations. The emphasis on strengthening the balance of payments position reflects continued caution over external financing conditions and capital flows. However, with the rupiah expected to remain stable on the back of policy measures and fundamentals, the BI did not view current external pressures as severe enough to warrant additional tightening. Concurrently, further hedging incentives were increased - a) swap hedging per tenor bucket was increased to 3M - 15%; 6M - 20%; 12M - 25%; b) DNDF incentive was increased to 6M - 25% and 12M – 30%. An increase in FX/ NDF swap premium incentives for longer tenors will lower hedging costs and encourage longer tenor positions, in turn increasing longevity of these flows; c) scheduled launch of the VASTRA scheme (FX Market Transactions for Hedging through Partner Banks) got underway, with the naming of 14 domestic partner banks. This facility is designed to help investors transact with lower underlying document requirements, tap longer banking hours and access onshore hedging facilities. Overall, policymakers are likely to tap a combination of, administrative and macroprudential measures rather than solely interest rates to defend the currency as well as keep inflationary expectations in check. We expect the pause on rates to extend into 4Q26.
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Related Insights
- IDR and INR rates: Domestic edge 25 Sep 2026
- North Asia rates: The high-beta plays 25 Sep 2026
- USD higher, AUD weakest, CNY stabilizes 25 Sep 2026
Related Insights
- IDR and INR rates: Domestic edge 25 Sep 2026
- North Asia rates: The high-beta plays 25 Sep 2026
- USD higher, AUD weakest, CNY stabilizes 25 Sep 2026