Indonesia’s benchmark stock index (Jakarta Composite Index, abbreviated IHSG) fell 0.28 percent to 5,130.50 points on Tuesday (16/09). About 4.35 billion shares, with a value of IDR 4.4 trillion (USD $370 million), were traded on the Indonesia Stock Exchange (IDX). Foreign investors, who accounted for 43 percent of trading activity on the IDX on Tuesday, recorded net selling of IDR 552 billion (USD $46.4 million).

Particularly Indonesia’s finance sector was vulnerable on Tuesday, declining 0.77 percent. Shares of the country’s three largest banks all fell: Bank Rakyat Indonesia (-0.96 percent), Bank Mandiri (-0.73 percent), and Bank Central Asia (-0.62 percent).

Ahead of results of the Federal Reserve’s FOMC meeting speculation emerged that the Fed will increase US interest rates sooner than expected as economic data of the world’s largest economy have improved. The US bond-buying program is expected to be wound down further at the FOMC meeting to USD $15 billion per month. However, last month the Fed stated that it would keep interest rates close to zero for a considerable time after the bond-buying program has ended. The Fed has held its key interest rate close to zero for more than five years.

When US interest rates are raised it will result in capital outflows from emerging economies. In particular those emerging economies that show fiscal instabilities are vulnerable. Indonesia is one of these countries as it has to cope with a wide current account deficit, thus undermining investors’ confidence. This deficit implies that Indonesia is dependent on foreign inflows to finance its economy, thus putting pressure on the Indonesian rupiah exchange rate. A weakening currency is problematic for investments in Indonesian stocks and bonds (a gain in the value of a stock can be evaporated by a decline in the vaue of the rupiah).

This week, foreign investors have been pulling out from Indonesia’s bond market amid heightened global uncertainty. According to data from the Finance Ministry, foreign holdings of government bonds declined by IDR 3 trillion (USD $252 million) to IDR 441.7 trillion (USD $37.1 billion) between 10 and 12 September 2014. Indonesian Finance Minister Chatib Basri said that he expects the rupiah exchange rate to continue depreciating until the FOMC results are published on Thursday (early morning, Indonesian time zone).

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.24 percent to IDR 11,903 per US dollar on Tuesday (16/09).

| Source: Bank Indonesia