Exchange Rate in Indonesia

Background information on Indonesia’s Exchange rate System:

Indonesia has implemented since 1999 a free floating exchange rate system where the exchange rate reflects the demand and supply in the market for the Indonesian rupiah, but in order to maintain a certain stability in its exchange rate, the bank of Indonesia can implement both Sterilized and Non-sterilized intervention, as well as indirect intervention (managing interest rate) to control or at least limit the variation in exchange rate and achieve monetary stability in the country.

Here are the different ways the central bank can maintain a sound and stable exchange-rate:

Foreign Exchange intervention in 2011 and 2012:

Exchange rate flexibility is very important in order to absorb shocks such as economic and financial crisis, on the graph below we can see clearly the high volatility of the Indonesian rupiah with financial crisis.

The intervention of the Bank of Indonesia in the foreign exchange market is a key to limit the high volatility of the Indonesian rupiah in certain situation. For example on the table above we could see the rapid appreciation of the rupiad in 2011, the role of Bank of Indonesia was to smooth the large fluctuation of the exchange rate in order to maintain financial stability in Indonesia, indeed this country being largely export-oriented an appreciation of the IDR would significantly reduces the export and thus damage the economy.

In Q3/2012, the Indonesian Rupiah has moved with market conditions depreciating a little bit, it follows the central bank policy to stabilize the currency, on the other hand some factors such as the worsening economic crisis in Europe and the slow economic recovery in the US. could have an