Rupiah vs Everybody: Why it is necessary for Bank Indonesia

Stable Indonesia Rupiah (IDR) is important for maintaining financial stability in Indonesia. A sharp depreciation of the IDR can lead to capital outflows, which can put pressure on the banking sector and destabilize the financial system.

The fact that money market is open for globalisation, it is also a challenge for Bank Indonesia to maintain IDR price.

During the last meeting for stating current interest rate, Bank Indonesia Governor, Perry Wijaryo (2023) concerning about current global market uncertainty, increase the challenge for emerging market like Indonesia to maintain their currency value in global market so it will not give any impact to the local economic situation. He also added “if we (Bank Indonesia) want to stabilize rupiah, we need to intervene the market” (Gayatri & Fransiska, 2023)

Bank Indonesia (BI) might adjust the reserve requirements that local banks must maintain. When BI raises reserve requirements, it limits the amount of IDR that banks are available to lend, which might restrict market supply and support the IDR exchange rate. When BI reduces reserve requirements, banks have more IDR available to lend, which increases the supply of IDR in the market and puts pressure on the IDR exchange rate. BI can also impact the supply of IDR in the market through open market activities such as purchasing and selling government assets. When BI purchases government assets, it injects IDR into the market, increasing IDR supply and putting pressure on the IDR exchange rate. When BI sells government assets, it absorbs IDR from the market, reducing the supply of IDR and thereby supporting the IDR exchange rate.

As an emerging country, BI maintaining the value of a Indonesia’s currency is important for promoting economic stability and growth, and for reducing the risk of economic instability and default. Central banks use a variety of tools and strategies to try to maintain the value of their country's currency in the money market.

Reference:

Gayatri, Franiska (2023) Bank Indonesia leaves rates unchanged, uses FX intervention amid market turmoil, Reuters. Thomson Reuters. Available at: https://www.reuters.com/markets/asia/indonesia-central-bank-leaves-interest-rates-unchanged-2023-03-16/ (Accessed: March 20, 2023).