The rupiah exchange rate against the US dollar has surpassed Rp17,400, raising concerns among market participants. The depreciation of the rupiah is seen as influenced not only by global dynamics but also by domestic economic fundamentals. Higher inflation rates have weakened the rupiah’s value, leading to its depreciation against the dollar. Other factors, such as the level of external debt, foreign exchange reserves, and the strength of domestic industries, also contribute to the currency’s weakening.
A lecturer at the Faculty of Economics and Business UGM (FEB UGM), Eddy Junarsin, Ph.D., explained that the weakening of the rupiah is the result of a combination of economic and non-economic factors. Technically, one of the causes is the decline in the trade balance surplus compared to previous periods. He noted that Indonesia’s trade balance remains in surplus, but the surplus has decreased, meaning exports still exceed imports, though the gap is narrowing.
On the global front, rising world oil prices have added further pressure. As a net oil importer, Indonesia must bear higher costs, which contributes to the rupiah’s depreciation. At the same time, policy interest rates remain relatively high in the United States, where the Federal Reserve is hesitant to lower them, prompting many investors to shift funds to safe havens.
“Capital flows in times like this tend to move to safer destinations, in the financial market context, for example, the United States,” said Junarsin on Tuesday (May. 5).
According to Junarsin, the weakening rupiah can also bring certain benefits. In international markets, Indonesian products become more affordable and competitive, potentially boosting exports and creating jobs. In addition, domestic production costs become relatively cheaper for foreign investors, encouraging foreign direct investment (FDI). However, not all sectors benefit.
“Industries that rely on imports, such as energy, imported food, as well as machinery and heavy equipment, will be adversely affected due to higher costs,” he explained.
Junarsin noted that the current pressure on the rupiah is still short-term. However, it must be addressed seriously to prevent it from escalating into greater volatility in financial markets. He warned that if not properly managed, the situation could trigger destabilizing speculation, in which market participants overreact in a panic, further exacerbating the rupiah’s decline.
“The current pressure on the rupiah is short-term. However, if not properly managed, it could lead to destabilizing speculation,” he said.
In this situation, Bank Indonesia (BI) faces a difficult policy dilemma. On one hand, lowering the policy rate could stimulate economic growth and create opportunities for full employment. However, such a move also risks increasing inflation due to a larger money supply. Conversely, raising interest rates may help control inflation, but it could slow economic growth and increase unemployment.
“If the policy rate continues to be lowered, economic growth is expected to improve, but the risk is rising inflation. Conversely, if the policy rate is increased, inflation can be better controlled, but economic growth may be hampered,” he explained.
Therefore, monetary policy must be implemented gradually and cautiously, maintaining a balance between price stability and economic growth. Intervention in the foreign exchange market is also considered necessary, but should be limited and sterilized.
“If carried out too aggressively to defend the rupiah, it could have adverse long-term impacts, such as the depletion of foreign exchange reserves and declining market confidence,” he said.
Furthermore, he emphasized that BI cannot work alone in maintaining economic stability. Fiscal policy support from the government is crucial, particularly in maintaining budget balance, providing appropriate incentives for businesses, and managing national debt efficiently.
Public and Investor Confidence
Amid the weakening rupiah, Junarsin advised individual investors to be more cautious in determining their investment strategies. Long-term fixed-income instruments are considered less favorable in a fluctuating exchange rate environment. Although they may offer attractive returns, the depreciation of the rupiah can reduce the real gains obtained.
On the other hand, stocks in defensive sectors are seen as more resilient to economic pressures. In addition, digital assets such as cryptocurrencies are attracting growing interest, although they still carry significant risks and must be approached prudently. Therefore, investment diversification is an important strategy for managing risk. By spreading investments across various asset classes, including global assets, investors can better balance risk and return.
“This strategy is increasingly relevant amid ongoing global economic uncertainty,” he said.
At the same time, risks to the national economy must be addressed seriously by all policymakers. The government is expected to communicate policies clearly and consistently to maintain public and investor confidence. In addition, legal certainty, fairness, and political and security stability are essential factors in creating a conducive economic environment.
“The government needs to communicate policies effectively. Legal certainty and fairness must be upheld and demonstrated. Freedom to innovate and business incentives need to be strengthened,” he concluded.
Author: Zabrina Kumara
Editor: Gusti Grehenson
Post-editor: Jasmine Ferdian
Photo: Freepik