Indonesia Rupiah Exchange Rate: How Will Bank Indonesia Respond?
In the morning of Thursday (05/12), Indonesia's rupiah exchange rate depreciated beyond the psychological level of IDR 12,000 per US dollar. In the Bloomberg Dollar Index, the rupiah fell 0.2 percent to IDR 12,011 as of 09:19:49. The main factor behind this decline is market participants' concerns about the end of the Federal Reserve's monthly USD $85 billion bond buying program. It is increasingly speculated that the winding down of this program will start sooner than expected.
Apart from the Federal Reserve's tapering issue, high US dollar demand from local Indonesian companies (for debt repayments) is also a contributing factor that has led to the rupiah's decline (to its lowest level in more than four years). This US dollar demand is expected to continue up to mid-December.
Bank Indonesia's Jakarta Interbank Spot Dollar Rate (JISDOR) fell 0.48 percent to IDR 12,018 per US dollar on Thursday (05/12). Bank Indonesia said that the rupiah is currently undervalued and has overshot considerably. It estimates that the range of IDR 11,000-11,500 per US dollar is a suitable level within the present economic context. The bank declined to inform whether it will defend the rupiah but did state to guard volatility and ensure market liquidity.
In order to support the rupiah exchange rate, Bank Indonesia might raise its benchmark interest rate (BI rate) at the next Board of Governor's meeting (12/12). At the moment, the BI rate is set at 7.50 percent. A drastic measure, such as raising the interest rate above the current inflation rate of 8.37 percent (November 2013, yoy) is a possible option to spur rupiah-denominated investments but may be unlikely as it will have a severe negative impact on the country's economic growth.
Indonesia Stock Exchange
During the first trading session on the Indonesia Stock Exchange (IDX), the benchmark index (IHSG) fell 0.98 percent to 4,199.87 amid an uncertain market environment. The performance was in line with performances of other stock indices in the Asian region.
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