Fixed Income Daily Update - August 20, 2026

BI held the policy rate at 5.75% in Aug-26, in line with our and market expectations, supported by the Rupiah appreciating 0.8% MoM to IDR17,855/USD and foreign portfolio inflows of USD1.8bn, led by SRBI and SBN. BI also broadened its Rupiah stabilization toolkit through i) a 12.5% FX swap hedging incentive for banks’ external borrowing and FDI with rollover flexibility, and ii) a 15% DNDF incentive alongside 10% incentives under LCT, reducing reliance on higher yields to attract FX liquidity.

BI is also creating more room to support growth, limiting further increases in SRBI yields as credit growth accelerated to 13.8% YoY in Aug-26 from 12.7% YoY in Jun-26, while banks’ average SRBI holdings declined to IDR618tr from IDR648tr. Nevertheless, another 25bps hike remains possible if an FFR hike strengthens the DXY, particularly should the Rupiah weaken beyond IDR18,000/USD and inflation return above 3.5% through YE2026, amid El Niño and higher global oil-price risks.

The 2027 RAPBN signals stronger fuel-subsidy rationalization, with the subsidized fuel quota set to decline by -58.5% to 20.09mn KL from 48.43mn KL in 2026, potentially creating additional fiscal space but raising risks to household purchasing power. Moreover, the ICP assumption of USD75/bbl remains below the current oil price of around USD83/bbl, leaving fiscal and inflation risks tilted to the upside should global oil prices remain elevated.

The Rupiah strengthened to IDR17,833/USD alongside a softer DXY at 99.45, while the 10Y and 2Y INDOGB yields declined by 5bps and 4bps to 7.11% and 6.77%, respectively, supported by lower UST yields of 4.69% and 4.15%. With INDOGB–UST spreads narrowing to 242.3bps (10Y) and 261.9bps (2Y), we remain constructive but more selective on duration, favoring short tenors for carry, gradually accumulating short-to-medium tenors as our core positioning, and accumulating long tenors on yield corrections.