Indonesia’s Exchange Rate: Fundamental Value & Path

  • Indonesia’s small-open economy is highly susceptible to external shocks, affecting Rupiah (IDR), considerably. Episodes like the Asian Financial Crisis and recent monetary tightening post COVID-19 have exposed the vulnerability of rupiah, often making it one of the most adversely affected emerging market currencies.
  • Bank Indonesia’s mandate as written in The Law of The Republic of Indonesia Number 4 Of 2023 Concerning The Development And Strengthening Of The Financial Sector: “The management of the exchange rate is aimed at maintaining the development of the exchange rate to be stable and in line with the fundamental conditions of the economy ….” underscores the importance of IDR exchange rates, especially against major currencies, such as the US dollar
  • This study examines the fundamental values of the IDR against the USD. We tested 10 models (8 standard and 2 extension) to discover Rupiah’s fundamental value. Four of these models offer decent predictive accuracy on the Rupiah’s value, while the other showed the potential of Rupiah to undershoot/overshoot (in the range of Rp15.600 – Rp15.900) compared to its actual. This study found that models with the extension of Financial Condition Index (FCI) show improved forecasting power. Based on the two best models, we find the fundamental IDR rate against the US dollar to be in the range of Rp14.700 – Rp15.200 until the end of 2023
  • Lastly, we also showed that short-term Rupiah stability is highly dependent on BI’s Foreign Exchange (FX) interventions like Domestic Non-Deliverable Forward (DNDF), Swaps, and Term-Deposits. The effectiveness of these tools, coupled with newly introduced policies like Exports FX Term-Deposit and Bank Indonesia Rupiah Securities (SRBI), will be crucial in offsetting potential domestic and external risks.

11 September 2023

Indonesia’s Exchange Rate: Fundamental Value & Path

Penulis :

Reza Yamora Siregar, Rizky Rizaldi Ronaldo