Indonesia’s economy is on track for a rebound, thanks to expansive macroeconomic policies. Fiscal actions are likely to play a bigger role as the opportunity for further monetary easing diminishes. A report anticipates a 25 basis point rate cut by Bank Indonesia, bringing the rate down to 4.5% in the first quarter. However, there are concerns about the Indonesian Rupiah because of fiscal risks and geopolitical factors.

Budget Deficit and Economic Strategy

The chance of changing the budget deficit limit has grown. This is due to a larger expected deficit in 2025 and its inclusion in a parliamentary priority program. Bank Indonesia is likely to take a supportive approach to help with this economic strategy. These factors create a cautious outlook for the Indonesian Rupiah. Fiscal and geopolitical issues are affecting its stability. Given the expected rebound, we view the upcoming rate cut by Bank Indonesia as a significant trading opportunity. A supportive stance from the central bank, along with a 25 basis point cut expected this quarter, bolsters a positive outlook for Indonesian stocks. We recommend buying call options on the Jakarta Composite Index (JCI), which has been stabilizing after mixed performance in 2025. However, we must also consider the major fiscal risks that could impact the currency. As the budget deficit expands in 2025 to support new programs, discussions about removing the legal 3% of GDP deficit cap create uncertainty. We suggest purchasing USD/IDR call options or non-deliverable forwards to safeguard against potential Rupiah decline.

Volatility and Trading Strategies

The difference between a positive outlook for equities and a cautious perspective on currency points to increasing volatility. In 2025, the Rupiah fell below 16,200 per dollar during times of global risk aversion, and current domestic fiscal concerns could lead to similar declines. This situation makes long volatility strategies using options appealing, as uncertainty around the deficit cap rises. Interest rate traders should pay attention to the shift from monetary to fiscal stimulus. With this likely being the last rate cut of the current cycle, it seems wise to position through interest rate swaps to receive a fixed rate. This strategy would take advantage of the final reduction in short-term rates before the government’s fiscal expansion drives the economy. Create your live VT Markets account and start trading now.

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