Domestic Forex Demand Affects the Difficulty of the Rupiah Strengthening

foreign exchange reserves

Indonesia’s currency, the Rupiah, has struggled to strengthen. The rupiah exchange rate even weakened again against the United States (US) dollar in early trading on Friday (6/1/). Bank Indonesia explained that domestic forex demand contributed to the Rupiah weakening.

This was conveyed by Edi Susanto, Head of the BI Economic and Monetary Policy Department. He explained that the weakening of the rupiah was influenced by domestic forex demand at the beginning of the year.

He explained that there was a large demand for foreign currency from SOEs. Moreover, previously there was a sizable disbursement of energy compensation funds from the Government at the end of the year. This is what makes it difficult for the rupiah to strengthen.

He said Friday (6/1), “In terms of global sentiment, actually, the pressure has not been too great these past few days.”

He emphasized that this caused the rupiah to weaken somewhat, which was different, compared to the movement of the currency exchange rates of peer countries in Asia which yesterday, Thursday (5/1/2023), generally strengthened.

It is known from Refinitiv data, the rupiah opened to trade by weakening 0.1% to IDR 15,620 / US $. The depreciation then increased to 0.16% to IDR 15,630/US$ at 9:07 West Indonesia Time.

Furthermore, market players are now waiting for the release of Indonesia’s foreign exchange reserves which previously experienced a decline for seven consecutive months before increasing last November. This can already give an illustration of the supply of foreign exchange draining in the country, even though it should be able to increase because the trade balance continues to print a surplus.

It is suspected that the exporters are placing their US dollars in Singapore. This is because interest rates on foreign currency deposits in Singapore are higher than those in Indonesia.

If foreign exchange reserves rise again in December, this will certainly provide positive sentiment. The efforts of Bank Indonesia (BI) to be able to withdraw foreign currency are starting to show and can strengthen the rupiah’s position.

Apart from that, the in and out of foreign capital also made it difficult for the rupiah to appreciate. On the stock market, in the 4 trading days this week, foreign investors recorded a net sale of around IDR 1.7 trillion.

Meanwhile, in the secondary SBN market, in the first two days of trading, there was an inflow of around IDR 2.5 trillion, according to data from the Directorate General of Risk Financing Management (DJPPR).