Indonesia and India have launched coordinated measures to stabilize their local currencies as rising geopolitical risks from the Iran conflict intensify pressure on emerging markets. The interventions follow a surge in volatility across EM asset classes and a sharp rise in risk premiums.
- Indonesia committed $12 billion in liquidity to stabilize rupiah and stimulate lending
- Rupiah has depreciated 7.3% against USD since February
- India’s foreign exchange reserves stand at $685 billion, a two-year high
- Brent crude (CL=F) rose 14% in February due to Iran conflict fears
- EM currency index down 4.1% over the past month
- EMB index saw $2.8 billion in outflows in three weeks
Indonesia has committed approximately $12 billion in targeted liquidity injections through its central bank to bolster domestic lending and support the rupiah, which has weakened by 7.3% against the U.S. dollar since early February. The move, announced by the newly appointed finance minister less than 48 hours after assuming office, aims to counteract capital outflows driven by escalating regional tensions involving Iran. India has similarly strengthened its foreign exchange reserves to $685 billion, the highest level in two years, while signaling readiness to intervene in currency markets if needed. The broader emerging markets (EM) currency index has declined 4.1% over the past month, with the MSCI Emerging Markets Index dropping 6.2% amid heightened risk aversion. Energy markets have been especially volatile, with Brent crude futures (CL=F) spiking 14% in February as fears of supply disruptions in the Strait of Hormuz mounted. This surge in oil prices has exacerbated inflationary pressures in import-dependent EMs, increasing the urgency for policy coordination. Central banks across Southeast Asia and South Asia are now prioritizing currency stability over inflation control, reflecting a shift in monetary policy focus. The actions by Indonesia and India are seen as a strategic effort to prevent a cascading depreciation in regional currencies, which could trigger broader financial instability. Market analysts note that without coordinated intervention, the risk of a systemic EM sell-off increases, particularly in debt and equity markets. The ripple effects are already visible: the EMB index has seen outflows of $2.8 billion in the past three weeks, and sovereign credit spreads for select EMs have widened by 35–50 basis points. Investors are adjusting portfolios, favoring short-duration bonds and hard-currency assets, while local investors face higher borrowing costs.