Inflation risks reinforce BI's hawkish stance

However, the upside pressure should be partly offset by easing prices of several key food commodities, with chicken, eggs, and cayenne pepper declining by -11.5% YTD, -10.8% YTD, and -11.0% YTD, respectively. Looking ahead, inflation risks remain tilted to the upside as BMKG projects El Niño to peak in Aug-26 with an index of 1.6—the same level recorded in Mar-24, when volatile food inflation surged to 10.4% YoY. In our view, the elevated inflation outlook reinforces BI's cautious policy stance and keeps the door open for further policy tightening should inflationary pressures and Rupiah volatility intensify.

Higher domestic yields have begun to restore the attractiveness of Indonesian financial assets, with the SBN market recording net foreign inflows of IDR5.6tr YTD and foreign ownership gradually recovering to above 12.7% of total outstanding. Domestic institutions continued to play a key stabilizing role, led by BI with net purchases of IDR432tr YTD, followed by insurance and pension funds (IDR135.9tr) and mutual funds (IDR14tr), offsetting banks' net outflows of IDR312tr. The repricing effect has been even more evident in the SRBI market, where higher yields have attracted around IDR102tr of foreign inflows YTD as of May-26, while foreign demand remained concentrated in short- (0–1Y; IDR30tr) and medium-term (2–5Y; IDR74tr) government bonds. Looking ahead, we believe BI retains room to tighten further through higher SRBI yields—and potentially another policy rate hike—should Rupiah pressures persist, reinforcing SRBI's role as BI's primary market-based stabilization instrument to attract portfolio inflows and safeguard exchange rate stability.