Concerns about the looming end of the Federal Reserve's monthly USD $85 billion stimulus program (known as quantitative easing or QE3) in combination with the deteriorating domestic economy of Indonesia has caused Indonesia's benchmark stock index (IHSG) to plunge 1.95 percent in the first trading session of 13 November 2013. The Indonesian rupiah exchange rate depreciated 0.28 percent to IDR 11,600 according to Bloomberg. These developments happen one day after the decision of Indonesia's central bank to raise the BI rate to 7.50 percent.
Yesterday (12/11), the benchmark interest rate (BI rate) of Indonesia's central bank was raised by 25 bps to 7.50 percent in order to curb high inflation (8.32 percent yoy in October 2013), support the rupiah exchange rate (which depreciated about 17 percent against the US dollar in 2013), and curtail the current account deficit (which was recorded at a record USD $9.8 billion in the second quarter of 2013, or equivalent to 4.4 percent of the country's gross domestic product). Between June and November, Indonesia's central bank has raised the BI rate aggressively from 5.75 percent to 7.50 percent, implying that the institution sacrifices higher economic growth for financial stability. Through this measure, credit growth as well as imports are curbed, thus having a positive impact on the current account deficit.
The higher BI rate was unable to support the rupiah because a number of Federal Reserve officials - including Richard Fisher and Dennis Lockhart - made statements that support a scaling down of the stimulus program. For market participants, concerns about the ending of the stimulus program outweigh Indonesia's central bank's decision to raise the BI rate.
The two sectors that were hit hardest in the first trading session on Wednesday (13/11) were property and infrastructure, falling 3.12 and 2.76 percent respectively. Not far behind was the banking sector with a 2.21 percent decline. The property and banking sector usually feel the hardest impact of an interest rate hike by the central bank.