In line with expectation, the central bank of Indonesia (Bank Indonesia) decided to keep its key interest rate (BI rate) at 7.50 percent for a seven consecutive month in September’s Board of Governor’s meeting (17/09) as it aims to stabilize the rupiah amid global volatility caused by looming higher US interest rates and China’s hard landing (as well as yuan depreciation), while combating inflation which stood at 7.18 percent (y/y) in August. The overnight deposit facility rate and lending facility rate were left unchanged at 5.5 percent and 8 percent, respectively.

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Morgan Stanley Investment Management, a leading global investment firm, said it now considers Indonesia’s rupiah and Malaysia ringgit as the most attractive emerging-market currencies. Both currencies have been the worst-performing Asian currencies against the US dollar this year amid looming tighter monetary policy in the USA, low commodity prices and China’s economic slowdown (as well as a political scandal in Malaysia). The ringgit has depreciated 21 percent, while the rupiah has weakened 16.2 percent against the US dollar since the start of the year. Both currencies are touching 17-year lows.

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With all eyes on the two-day policy meeting of the Federal Reserve, we could almost forget that the central bank of Indonesia (Bank Indonesia) will also hold its monthly policy meeting today. Similar to the topic discussed in the Federal Open Market Committee (FOMC) meeting (16-17 September), Bank Indonesia may consider raising its key interest rate (BI rate) as a Fed Fund Rate hike would trigger capital outflows, while Indonesia’s inflation rate remains high and the rupiah is fragile.

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Contrary to mostly rising Asian and global stock indices, Indonesia’s benchmark Jakarta Composite Index (IHSG) fell 0.34 percent to 4,332.51 points on Wednesday (16/09) as the rupiah continues to slide against the US dollar causing concern about corporate earnings of listed companies on the Indonesia Stock Exchange and eroding the value of Indonesian assets purchased by foreign investors. Outside Indonesia most markets were up as investors are in anticipation of a crucial two-day Federal Reserve policy meeting (16-17 September).

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Ahead of the Federal Open Market Committee (FOMC) meeting, the two-day policy meeting which starts today (16/09), the US dollar continues to appreciate against most currencies, including the Indonesian rupiah, as investors remain cautious ahead of a possible US interest rate hike. By 09:36 am local Jakarta time, the rupiah had depreciated 0.29 percent to IDR 14,450 per US dollar according to the Bloomberg Dollar Index, a fresh 17-year low.

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Indonesian stocks and the rupiah are having a tough day as investors are cautious ahead of the Federal Reserve’s two-day policy meeting (16-17 September), while Indonesia’s August 2015 trade surplus was slightly below analysts’ expectations. By 14:40 pm local Jakarta time, Indonesia’s benchmark Jakarta Composite Index had weakened 1.17 percent to 4,339.07 points, while the Indonesian rupiah had depreciated 0.47 percent to IDR 14,401 per US dollar (Bloomberg Dollar Index).

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While most Asian stock indices were mixed, Indonesia’s benchmark Jakarta Composite Index rose 0.69 percent to 4,390.37 points on Monday (14/09) with foreign investors recording a net buy of IDR 91.2 billion (approx. USD $6.5 million). Meanwhile, ahead of a crucial Federal Reserve meeting, the Indonesian rupiah depreciated 0.08 percent to IDR 14,333 per US dollar according to the Bloomberg Dollar Index.

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Based on data from the Inter Dealer Market Association, Indonesia’s ten-year sovereign bond yield climbed 31 basis points since 4 September 2015 to 9.24 percent, its highest level since 2010, on Friday morning (11/09) amid concern about the ailing rupiah. The rupiah has been under pressure as emerging market currencies have become unattractive ahead of a looming US interest rate hike and China’s recent decision to devalue its yuan (triggering concern about a currency war among Asia’s emerging currencies).

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According to credit rating agency Standard & Poor’s (S&P), Indonesian companies will have difficulty to pay their (growing) overseas debt in case the rupiah will touch IDR 15,000 per US dollar. Particularly as most Indonesian companies have to face declining profit and revenue growth due to curbed domestic demand amid Indonesia’s economic slowdown.

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Indonesian stocks and the rupiah started weak on Thursday morning (10/09), the day after the Indonesian government unveiled its first economic policy package. In line with the trend in the whole region this morning, most (emerging market) assets in Asia are declining on weak Chinese and Japanese economic data. These weak data cause heightened concern about sluggish global economic growth.

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Both the Jakarta Composite Index (Indonesia's benchmark stock index) and the Indonesia rupiah exchange rate are under pressure this morning as market participants are waiting for results of the central bank's Board of Governor's meeting that is held today (12/12) in Jakarta. Speculation has emerged that Indonesia's central bank (Bank Indonesia) will raise its benchmark interest rate (BI rate) one more time in 2013 in order to combat the country's current account deficit as well as mitigate the impact of a possible winding down of QE3.

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Although Indonesia's benchmark interest rate (BI rate) was kept at the level of 7.5 percent (in line with market expectation) today (12/12), it was not able to support the country's stock index. Indonesia's IHSG index fell 1.39 percent to 4,212.22 points. The index was negatively impacted by Asian stock indices that were down due to concerns about the looming end of the Federal Reserve's quantitative easing program. This made investors' positive reaction to the BI rate of temporary nature. Weak openings in Europe increased downward pressure.

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One of the main problems of Indonesia's benchmark stock index (IHSG) is the profit taking that immediately happens after a day of strong growth. On Wednesday (11/12), the IHSG index was plagued by profit taking since the start of the first trading session. Moreover, the index was impacted by mostly falling Asian stock indices as well as the Indonesia rupiah exchange rate which went above the IDR 12,000 per US dollar level again. The only support the IHSG received was just before its closing when European indices opened up.

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Throughout the morning, the Indonesia rupiah exchange rate showed volatile movement on Tuesday (10/12). In the Bloomberg Dollar Index, the currency was up 0.45 percent to IDR 11,920 per US dollar at 16:20:51 local Jakarta time. The rupiah's performance is volatile because negative sentiments are brought on by improving economic data from the USA, causing a strengthening US dollar, while positive market sentiments are brought on by the new fiscal policies that were announced by the Indonesian government.

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Indonesia's benchmark stock index (the Jakarta Composite Index or IHSG) continued yesterday's rise on today's trading day (10/12), supported by indices on Wall Street that climbed due to the lower VIX index (Chicago Board Options Exchange Market Volatility Index) although Asia's stock indices were mixed, while the Indonesia rupiah exchange rate continued its decline. Indonesia's manufacturing stocks were up along with consumer, automotive and processed foods stocks.

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After appreciating on Monday morning (09/12), the Indonesia rupiah exchange rate started to weaken against the US dollar in the afternoon. At 15:10:29 local Jakarta time, the rupiah stood at IDR 11,970 per US dollar in the Bloomberg Dollar Index, a 0.05 percent depreciation from the start of the day. The rupiah exchange rate is fluctuating due to positive sentiments caused by Indonesia's October trade surplus as well as China's low inflation and negative sentiments brought on by the looming end of the Federal Reserve's quantitative easing program.

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ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the November 2013 edition, a number of important issues that are monitored include Indonesia's inflation rate, the trade balance, the current account deficit, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:

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Indonesia's Finance Minister Chatib Basri stated that the government of Indonesia is busy preparing three new policies that aim to restore financial stability as well as attract foreign direct investments. These three new policies involve the higher sales tax on imported luxury cars, a revision of Indonesia's negative investment list, and the higher income tax on imported consumption goods. These three new policies are in addition to the policy package that was introduced by the Indonesian government in August 2013.

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Falling stock indices on Wall Street on Wednesday (04/12) impacted on Asia the following day resulting in the majority of Asian indices being down on Thursday's trading day (05/12), including the benchmark stock index of Indonesia (IHSG). Besides the impact of Wall Street, Asian stock markets are also vulnerable to ongoing concern about the future of the Federal Reserve's quantitative easing program. In the case of Indonesia, negative market sentiments are intensified by the continued depreciation of the rupiah exchange rate.

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In the morning of Thursday (05/12), Indonesia's rupiah exchange rate depreciated beyond the psychological level of IDR 12,000 per US dollar. In the Bloomberg Dollar Index, the rupiah fell 0.2 percent to IDR 12,011 as of 09:19:49. The main factor behind this decline is market participants' concerns about the end of the Federal Reserve's monthly USD $85 billion bond buying program. It is increasingly speculated that the winding down of this program will start sooner than expected.

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