Currency Market - Indonesia

Topics: Foreign exchange market, Central bank, Monetary policy Pages: 20 (3618 words) Published: September 5, 2013

Project Report


Currency Market - Indonesia

International Finance - Group 5

Name Roll Number

1. Mr. Lawrie DiasA012

2. Mr. Vipin GroverA016

3. Ms. Surabhi DwivediA014

4. Mr. Ram MulikA030

5. Dr. Dhawal PatelA033

6. Mr. Datta SidgiddiA056


Indonesia – Exchange Rate System4

1.       The fixed rate over 1970 to 19784

2.       Managed floating exchange rate system since 19784

3.       And the free floating exchange rate system since August 14, 1999.4

Regulatory and Institutional Structure4

1.Ministry of Finance4

2.Financial Services Authority (OJK)4

3.Bank Indonesia5

4.Indonesia Commodities and Derivatives Exchange (ICDX)5

Currency Exchange/Flow Policy6

Monetary Policy Framework in Indonesia6

Monetary Policy Objectives6

Coverage of Regulation7

Decision Making Process8

The Size, Structure and Character of the Currency Market9

Size of Currency Market9

Structure of Currency Market12

Foreign Exchange Trading System from 1989 to present13

Market Players13

The Interbank Market and The Retail Market13

JIBOR Contributors14

Economic Indicators15

Mean CPI, Inflation, Interest Rate15

Balance Of Payments15

Brief background on Indonesia’s BOP position in last 5 years16

International Parity Conditions16

Purchasing Power Parity and Inflation Scenario in Indonesia16

Interpretation of PPP19

Big Mac Index19

Interest Rate Parity20

Interpretations of Interest Rate Parity21

International Fisher Effect21

Outlook on Indonesian Market over a short to medium term23

Impact on India’s Trade of Goods and Services with Indonesia24


Indonesia – Exchange Rate System


Indonesia, since 1970, has implemented three exchange rate systems:

1.       The fixed rate over 1970 to 1978

Following a period of floating the rupiah from 1966 to 1971 to permit the market to set its value in foreign currency, Bank Indonesia pegged the exchange rate at Rp415 per US$1 

To address the eroding profits of exporters, Bank Indonesia was compelled to devalue the rupiah by 50 percent in 1978, bringing the exchange rate to Rp625 per US$1


2.       Managed floating exchange rate system since 1978

The third major devaluation since 1971 was undertaken in September 1986, primarily in response to the decline in foreign exchange earnings through oil exports. The exchange rate rose from Rp1,134 per US$1 to Rp1,641 per US$1.


3.       And the free floating exchange rate system since August 14, 1999.


The implementation of the last mentioned system means that the exchange rate of the Rupiah is determined solely by the market. Thus, the exchange rate reached reflects the interaction of supply and demand in the market. In order to maintain a stable exchange rate, Bank Indonesia performs sterilization in foreign exchange market at a certain period of time, especially during an irregular fluctuation of exchange rate.


Foreign exchange reserves are aggregate net foreign asset position of the Government and foreign exchange banks

Regulatory and Institutional Structure

Ministry of Finance

The Indonesian Export Financing Institution regulates the granting of financing facilities to business entities or individuals that conduct export activities. The facilities can be applied for to the The Indonesian Export Financing Institution or Lembaga Pembiayaan Ekspor National (LPEI), which is the agency in charge of this matter under the Ministry of Finance (“MoF”).

Financial Services Authority (OJK)

FSA is an autonomous Government Agency whose vision is to be the watchdog that reliable financial services industry,...
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