JAKARTA — Bank Indonesia’s decision to hike the benchmark interest rate to 5.25% is set to shift the landscape of foreign capital flows within Indonesia’s financial markets. As yields become increasingly competitive, foreign investors are expected to pivot away from equities and toward the bond market.
Nafan Aji, a Senior Analyst at Mirae Asset Sekuritas Indonesia, highlights that the rate hike significantly boosts the appeal of fixed-income instruments, particularly government bonds (SBN). This shift is likely to trigger a capital inflow into the bond market, while the stock market may face heightened volatility and downward pressure in the near term.
According to Mirae, the rise in the BI Rate typically triggers a corresponding increase in government bond yields. As SBN yields climb, the spread against US Treasuries widens, making Indonesian fixed-income assets far more attractive to global investors. “The Indonesian bond market is becoming more compelling because it offers measurable risks coupled with higher returns,” Aji noted in a recent research report dated Thursday, May 28, 2026.
Shifting Market Sentiment and Sector Impacts
Conversely, the stock market is bracing for a phase of rebalancing as foreign investors shift their preferences from high-risk assets to more defensive instruments. This defensive rotation is expected to suppress the Composite Stock Price Index (IHSG) in the short term. Furthermore, the rate hike will affect various sectors differently, creating a complex environment for market participants.
The property and real estate sectors are anticipated to be among those hit hardest. Higher interest rates are likely to drive up mortgage rates, which could dampen consumer purchasing power and slow down property sales. Similarly, the technology sector faces substantial pressure; as these companies often rely heavily on external funding for expansion, the increased cost of capital will weigh on valuations for growth-oriented stocks. Additionally, cyclical companies with high debt loads and floating-rate loans are particularly vulnerable to surging financial expenses.
Defensive Pockets and Market Liquidity
Despite the broader market cooling, some defensive sectors are expected to benefit. The banking sector, particularly large-cap institutions (KBMI IV), may enjoy improved Net Interest Margins (NIM). Banks generally possess the flexibility to raise loan rates faster than deposit rates in the short term, boosting their profitability. Likewise, the consumer non-cyclicals sector remains resilient, as demand for essential goods tends to stay stable regardless of macroeconomic fluctuations.
The move by Bank Indonesia is also expected to impact domestic liquidity. A tighter monetary policy often leads to a liquidity squeeze, as investors reallocate funds into interest-bearing instruments such as the central bank’s SRBI and SVBI certificates, or traditional bank deposits, which now offer higher returns with lower risks.
As a result, liquidity circulating within the stock market is expected to contract. Daily transaction volumes and values on the Indonesia Stock Exchange (IDX) may slow as market participants adopt a “wait and see” approach or migrate capital toward cash and bonds. “With the cost of capital on the rise, liquidity on the exchange floor typically dries up, and investors naturally become more cautious,” Aji concluded.
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Summary
Bank Indonesia’s recent interest rate hike to 5.25% is expected to redirect foreign capital from the stock market toward government bonds, which have become more attractive due to higher yields and a wider spread against US Treasuries. While this shift enhances the appeal of fixed-income instruments, the stock market faces increased volatility as investors pivot toward defensive assets. Sectors such as property and technology are particularly vulnerable to rising borrowing costs, while large-cap banks and consumer non-cyclicals may remain resilient.
The tightening of monetary policy is likely to cause a liquidity squeeze, as market participants reallocate capital into higher-yielding instruments like central bank certificates and deposits. Consequently, the Indonesia Stock Exchange may experience lower transaction volumes as investors adopt a cautious approach amid higher capital costs. This rebalancing highlights a broader market trend toward risk aversion in response to the central bank’s efforts to stabilize the economy.
