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Indonesian rupiah

The Indonesian rupiah is the official currency of Indonesia. Symbol Rp is used to denote the currency on coins and bills. Still Forex market applies index IDR for the denomination of the Indonesian rupiah. The name has derived from the Indian rupee. Informally, the currency is called “Perak” which means “silver” in Indonesian.

Currently, the banknotes of 1,000, 2,000, 5,000, 10,000, 20,000, 50,000, 100,000 rupiahs are in circulation.

For a long time the government of Indonesia was setting fixed rupiah rate daily. However, in 1987 the decision was taken to terminate the fixed rate and bind the rupiah to the currency basket, consistent of 7 currencies, including the U.S. dollar. Nevertheless, in reality, the IDR rate was controlled by the Bank of Indonesia and was based on IDR/USD rate. Since that moment, volatility of the rupiah was determined by comparison of economic figures of the USA and Indonesia. For example, at the end of 1997 the inflation rate in Indonesia was noticeably higher than in the USA, which made the IDR rate to fall significantly against the U.S. dollar and, consequently versus other currencies making up the basket. Thus, the risks connected with the drop in the IDR rate are triggered by the U.S. economy. Any events influencing the American and Indonesian economies result in significant volatility of the rupiah versus other currencies, and especially against the U.S. dollar. But the U.S. economy and the greenback are not the only factors affecting the IDR rate. The rupiah, as any other currency, is prone to inflation, GDP, industrial output, liquidity, conditions of financial institutions of the country as well as crisis factors in Indonesia and Southeast region of Asia.

The Bank Indonesia has several mechanisms to regulate the national currency rate. Apart from standard ones, such as purchasing or selling currency by the government, the Bank Indonesia increases liquidity of national banks in some cases by means of financial support. Moreover, the CB actively changes the repo rate in accord to market needs.

In case the governmental measures are insufficient to restore the rupiah rate and the national currency continues to collapse, the government addresses the IMF asking for aid, which occurred twice in the history of Indonesia, last time when a large financial crisis happened in Asia in 1998-1999. Back then, the rate of the Indonesian rupiah lost one third versus the U.S. dollar. It should be noted that despite IDR is considered to be a freely convertible currency, its risk components are among the highest in the world. As far as Indonesia is not the major economic country and has rather unstable financial system, the volatility of its national currency, which depends on USD, differs a lot from that one of the euro or Australian dollar, for example, which are not bound to the American dollar so much and have more stable financial instruments.

In 2013 the Indonesian government is set to denominate the rupiah by removing three zeros on bills. Such measure is aimed to make the economy healthier and regulate the monetary system, however it will not solve the issue of high volatility and other possible risks.

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