On May 5, 2025, the rupee fell to its weakest level ever at 17,445 against the US dollar. The figure even surpassed the low point of the 1997–1998 Asian financial crisis, an economic disaster from which Indonesia took years to get well.
However, economists agree that today’s situation is structurally different, although the pressure is real and can’t be ignored.
So what makes the rupee so vulnerable and why is the issue more complex than an easy war within the Middle East?
The rupee was already weak before the war
It is vital to notice that the rupee was already under pressure before the outbreak of the conflict in Iran in late February. Investors were already concerned about three issues: Indonesia’s fiscal situation, central bank independence and capital market transparency. The war only accelerated tensions that were already constructing.
The structural root lies within the balance of payments. Indonesia has recorded a persistent current account deficit almost yearly, except in 2021-2022, when the post-pandemic boom in goods exports temporarily created a surplus.
In 2025, the deficit remained relatively small and amounted to USD 1.5 billion. However, markets expect it to expand because the US attack on Iran sharply raises the costs of imported energy.
The problem is exacerbated by Indonesia’s economic structure. The country exports dollar-denominated goods similar to nickel, coal and palm oil, while importing dollar-denominated basic goods including refined fuel, capital goods and food.
When oil prices rise, import costs rise faster than export profits. As a result, the trade deficit is widening as a substitute of decreasing. This flies within the face of the common assumption that rising commodity prices should profit exporters like Indonesia.
Technical aspects added additional pressure. Many corporations default on foreign currency debt in April and May, causing a seasonal increase in demand for the dollar that further depreciates the rupee.
Lots of policy tools, but no perfect answer
To contain this pressure, the Bank of Indonesia (Central Bank of Indonesia) launched just about all of its instruments concurrently, including interventions within the money market, the overseas NDF market, the domestic DNDF market and the secondary government bond market.
It also introduced more stringent administrative measures as a “fifth weapon”. The limit for money purchases without supporting documents has been reduced from $100,000 in March to $25,000 a month, a 75 percent reduction in only two months. This isn’t officially considered capital control, nevertheless it effectively limits speculative demand for the dollar.
Foreign exchange reserves were also intensively used. In the primary quarter of 2026 alone, Bank Indonesia spent $8.3 billion, leaving reserves at $148.2 billion at the tip of March, the bottom level since July 2024. Reserves are still adequate, however the pace of their depletion shows how aggressive the intervention has been.
The rate of interest dilemma is equally difficult. As of September 2024, Bank Indonesia has reduced rates of interest by 150 basis points to 4.75%, a wise move considering that inflation stays below the two.5% goal and growth is forecast at 4.9-5.7%.
However, each rate cut narrows the yield gap with the Federal Reserve, making rupee assets less attractive to foreign investors and increasing capital outflows. In practice, the central bank faces a difficult trade-off: supporting growth risks weakening the rupee, while defending the currency could slow the economy.
How is that this different from the 1997 crisis?
In nominal terms, the rupee is now weaker than at the peak of the 1997–1998 crisis. However, comparing raw data is misleading.
The biggest difference is the exchange rate system. In the Nineteen Nineties, the rupee was closely linked to market value.
When the federal government could now not defend it, the currency quickly collapsed by greater than 500 percent, causing panic and systemic failure. Today, the rupee is freely traded. Depreciation at the extent of 4-5%. during the last 12 months is serious, but incomparable in scale.
Indonesia’s external debt structure can also be much healthier. As of 2025, the overall external debt of the private and non-private sectors is roughly 30% of GDP and is principally long-term debt.
In the Nineteen Nineties, debt levels were higher and dominated by short-term dollar liabilities, leading to widespread defaults when the rupee collapsed. This condition doesn’t exist today.
Still, the danger stays. Markets proceed to query Indonesia’s ability to take care of rising external deficits, weak capital market supervision and aggressive fiscal policies despite last 12 months’s revenue shortfall.
Ultimately, the important thing factor stays policy credibility, i.e. investors’ trust within the consistency and predictability of presidency policy.
Why do his neighbors suffer a unique fate?
While the rupiah has fallen to its lowest level in years, two of Indonesia’s neighbors are heading in the other way.
The Malaysian ringgit has appreciated 12 percent over the past 12 months, the largest gain in Asia. Growth isn’t solely driven by a weaker US dollar.
Bloomberg evaluation shows that only a couple of quarter of the gains were driven by global macro aspects, while the remainder was made up of a 47% increase in foreign investment in 2025, stronger-than-expected growth and Malaysia’s growing role in Asia’s artificial intelligence and data center supply chain.
Singapore has taken an excellent clearer approach. The Monetary Authority of Singapore (MAS) has allowed the Singapore dollar to understand faster to regulate inflation, which has been made possible by Singapore using the exchange rate, reasonably than rates of interest, as its essential policy tool. Its status as a stable financial center also attracts capital withdrawing from the unstable Middle East.
The key difference is that Malaysia and Singapore proceed to take care of strong investor confidence at a time of world uncertainty because of solid fundamentals, sustained investment inflows and, in Singapore’s case, greater policy flexibility.
Despite having one in every of the very best growth rates within the G20, Indonesia still faces unresolved concerns about fiscal credibility and capital market governance.
