Beware of the Impact of Tapering Off on the Rupiah Exchange Rate

The world is once again overshadowed by the tightening of monetary policy (tapering off/TO) by the United States Federal Reserve (The Fed). This policy has raised concerns about the stability of financial markets, including Indonesia's. One of the impacts is the weakening of the Indonesian Rupiah against the US dollar.

This can be seen from events that occurred in 2013. Dinata and Oktora (2020), in their paper "The Influence of Quantitative Easing and Tapering Off and Macroeconomic Indicators on the Rupiah Exchange Rate," explain that Indonesia's economic conditions changed after the Fed officially announced the TO policy in December 2013. The immediate effect was a continued weakening of the Rupiah against the US dollar since the deficit in the capital and financial transaction balance.

The Rupiah exchange rate had strengthened to Rp 9,605/US$ on October 29 and 30, 2021. However, this trend stopped, and the Rupiah weakened further.

Bank Indonesia (BI) Governor Perry Warjiyo has been wary of a repeat of this since February 2021. Therefore, the impact is believed to be less severe than in 2013.

According to Bank Indonesia data, the Rupiah exchange rate showed a strengthening trend from July 21, 2021, to August 5, 2021. However, the Rupiah then weakened again. Today, the Rupiah weakened to Rp 14,464/US$. Ibrahim Assuaibi, Director of PT. TRFX Garuda Berjangka, explained that the weakening of the Rupiah is due to external factors, namely the Fed's policy of reducing stimulus this year. In addition, the market responded negatively to Indonesia's trade deficit.