Mirza Baig, head of foreign exchange and interest rate strategy – Asia, BNP Paribas (pictured):
After spending much effort to defend the 10,000 level, Bank Indonesia (BI) has allowed the rupiah to slip past that key benchmark. I believe their foremost concern was the drain on FX reserves – particularly in the month of June when reserves fell by $7 billion. Authorities are now acknowledging that they “cannot go against the tide of capital outflows.”
 
BNP has long argued the source of rupiah’s depreciation is largely on account of low commodity prices, especially coal and palm oil, and strong domestic credit growth. This fundamental pressure was exacerbated by portfolio outflows from global emerging markets because of fears of an early end to the Federal Reserve’s (Fed) quantitative easing.
 
There is little the central bank can do to control external factors like Fed policy and commodity prices. As such, allowing some flexibility in the exchange rate is a good policy. However there will be repercussions on domestic inflation. The key to successfully navigating the myriad external shocks on the currency is to tighten monetary policy, especially since real short-term rates remain negative. As such, increasing rates is key to both handling the inflationary consequences of a weak rupiah, and also critical for stabilising the rupiah.