The Rupiah exchange rate reached its lowest level or around IDR16.240 (as of 17 April 2024) in the last four years. This condition certainly causes concern for financial markets. There are several factors that can explain the depreciation of the Rupiah. From the external side, the increasing recovery of the United States economy along with the heated geopolitical situation has caused the Rupiah to weaken. These two conditions further amplified the strengthening of the dollar due to capital outflows which also triggered an increase in government bond yields. From the domestic side, Indonesia's inflation is also still higher than expectations. The inflation rate is predicted to continue to increase, in line with the increase in world oil prices caused by tensions in the Middle East. The increase in oil prices could cause food and energy inflation, as well as imported inflation to remain high. If this continues to happen, domestic business actors who use imported raw materials will be forced to reduce production.
Responding to this dynamic, there are several policies that the Indonesian government can implement. From the monetary side, in the short term Bank Indonesia needs to intervene with various policy-mixes such as market intervention through purchases on the bond market, spot foreign exchange and domestic non-deliverable forwards (DNDF) or issuing various securities such as Bank Indonesia Rupiah Securities (SRBI), Bank Indonesia Foreign Currency Securities (SVBI), and Bank Indonesia Foreign Currency Sukuk (SUVBI) with more competitive interest. Bank Indonesia can also use foreign exchange reserves wisely to protect the Rupiah, considering that the available reserve position is still quite good. The final option is of course to increase interest rates by around 25 bps, but this policy needs to pay attention to domestic conditions, especially the impact on the real sector and anticipation of the credit restructuring policy which will end in March 2024.
From a fiscal perspective, policies related to depreciation may not be directly related, but fiscal policy can be implemented to anticipate the impact of Rupiah depreciation on inflation. Social protection policies such as income support and reallocation of the energy subsidy budget are one alternative. Export Proceeds Foreign Exchange (DHE) policy might help the monetary authority in maintaining the value of the Rupiah. However, policy choices from the fiscal side also need to pay attention to Indonesia's fiscal capacity. A prudent fiscal policy gives a signal to investors that the risk of investing in Indonesia will be very small, so that the flow of funds into Indonesia can be maintained and it is hoped that it will be able to reduce the volatility faced by the Rupiah.
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