Lloyd Chan, senior currency analyst at MUFG, notes that Bank Indonesia has maintained its 2026 growth forecast of 4.9-5.7% and still expects inflation to remain within its target of 1.5-3.5%. However, the risk of rising inflation may weigh on the rupee if policymakers allow the economy to grow. Higher bond yields and overvalued 10-year bonds present additional policy trade-offs for BI as it considers a gradual policy easing.

Growth targets maintained as inflation risks boost

“BI maintains its 2026 growth forecast at 4.9-5.7% and continues to expect inflation to remain within its target range of 1.5-3.5% this year. However, inflation risks will be shifted upwards if policymakers allow the economy to run warmer and the output gap narrows further. Higher inflation will be a drag on the rupee.”

“As a side note, demand at recent bond auctions has also weakened: the February 18 auction saw the lowest bid-to-cover ratio since March 2025, at just 1.71x for 10-year bonds, well below the average level seen in 2024-2025. Similarly, for 5-year bonds, the result was benign, with a coverage ratio of 1.47x, the lowest from May 2024.”

“Our model suggests that 10-year government bonds appear overvalued relative to macro fundamentals, while the technical picture points to a further rise in bond yields, reinforcing short-term negative trends for the rupee.”

“There has been a net increase in SRBI bond outstandings since November 2025, while SRBI bond yields have also increased by around 11-14 bps since September last year. This is likely due to a moderate increase in non-resident inflows into SRBI since December. On the margin, these inflows could slightly offset foreign outflows from equities and government bonds.”

(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor.)