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DETERMINATION OF

EXCHANGE RATE
MOVEMENTS OF INDONESIAN
RUPIAH

Submitted By – Group 1 (Finance)

A V Siri Chandana – 18020841097


Akash Chainde – 18020841099
N Sundeep Babu – 18020841114
Vanisha Mittal – 18020841143
Sahiba Anand – 18020841128
ABSTRACT
• AIM: To Find out the effect of various macro variables on the Exchange rate of
Indonesian Rupiah.

• MACRO ECONOMIC VARIABLES


1. Inflation of Malaysia
2. Inflation of Unites States
3. Inflation of Indonesia
4. GDP of China
5. GDP of Indonesia
6. GDP of Malaysia
7. GDP of USA
8. PPP of China
9. PPP of Indonesia
10. PPP of Malaysia
11. CAD of Indonesia
12. CAD of Malaysia
13. Interest Rates of US
14. Oil Prices
INTRODUCTION
• Indonesian economy is one of the largest economies of
Southeast Asia and known to have huge economic potential.
• 16th largest in terms of nominal GDP and 7th largest in terms of
PPP.
• Major sectors that contribute towards Indonesian economy are
agriculture and oil & mining .
• They have seen strong structural economic growth because of
the following reasons:
• availability of abundant natural resources
• stable government
• young population
• labor costs are low
• fiscal management since late 1990’s
Literature Review
• Exchange Rate
• Supply and Demand of currency in forex
markets.
• Inflation causes increase in Imports and leads
to depreciation.
• GDP affects in two ways –
– Income effect.
– High growth prompts increase in interest rates.
• Globalization effect.
• Monetary approach of determining exchange
rates.
• National debt of an economy.
RESEARCH METHODOLOGY

• Research Methodology refers to a systematic study of defining a problem


• PROBLEM/OBJECTIVE - determination of the exchange rate of Indonesian Rupiah
• For determining the effect we have opted to carry to a basic linear regression on
the Indonesian’s Rupiah exchange rate as the dependent variables and 15
independent variables that include inflation, GDP, PPP, CAD, Interest rates of the
four nations and Oil prices
• Research Methodology primarily includes Research Design, Sampling Design, Data
Collection and Data Analysis
RESEARCH DESIGN
• There are primarily two types of research design Exploratory and Descriptive/
Diagnostic
• In this case, we have focused ourselves on describing the level of influence the
macroeconomic indicators have on Indonesian Rupiah
• Hence we have opted for a Diagnostic Research design through Linear Regression.
• Y = β0 +∑βiXi (i= 1,2,3,…,15)
• Further we have a hypothesis testing to determine the reliability of our model
• Null Hypothesis - β1= β2=…..= β15=0
Alternate Hypothesis - β1≠ β2≠…..≠ β15≠0
• If the hypothesis is proved to be true, the regression model thus formed is
insignificant.
DATA COLLECTION
• Being a descriptive research, we have acquired the necessary data for our research
through secondary sources
• The data for inflation of the four nations mentioned in the research have been
acquired from the IMF (International Monetary Fund)
• The data for PPP, CAD, GDP, Interest rate and Global Oil prices have been taken
from Bloomberg Terminal
• Since the macroeconomic indicators mentioned here span over a large period of
time, we have confined our sample to the data from 1980 to 2018
• To avoid missing values and discrepancies in the data we preferred to choose the
sample from 1980
• All the data collected is from 1980 to 2018 but it was observed few data had been
missing for Global Oil Prices
• This missing data is because of different extraneous reasons and hence the missing
values had been replaced with the median value of the rest of the column values
• Other important factor, Government debt was excluded since the data was not
available for this important factor. Hence we exempted this factor as extraneous
variable for our study
DATA ANALYSIS
•Here, p(=0.000)<α(=0.0510) where p is the
level of significance that we can operate on
and α is the level of significance we intended
to operate
•With a high value of adjusted R-square we
can say that the regression model is a good
fit for the determination of the exchange
rate.

LINEAR REGRESSION MODEL TO


DETERMINE EXCHANGE RATE
Y = 0.319-0.022 X1+0.09 X2+0.04
X3+0.135 X4+1.056 X5-0.759 X6+1.133
X7+0.437 X8-0.142 X9+0.447 X10-0.398
X11+0.051 X12-0.111 X13-0.124 X14-
0.022 X15
Results & Findings
• Fluctuations in GDP, PPP, CAD, Inflation of China,
Malaysia and United States impacts Indonesia to a
degree of 96.47%.
• Due to this degree of interrelation, Exchange rate
overshooting has become a part of Indonesian
economy.
• Exchange rate policy hence became an integral part
of overall macro and monetary policy geared towards
stability and growth.
Steps taken
• In order to combat the volatility of the Rupiah, the
Indonesian government had adopted adequate
measures as is evident.

• Indonesia changed its regime from managed to fully


floating.
Conclusion
Taking into account Indonesian Rupiah as the dependent variable and
other 15 factors as the independent variables, it was found that while
certain factors affected positively, the others affected negatively-

• Factors that affect positively : Inflation of Malaysia, Inflation of


United States, Inflation of Indonesia, GDP of China, GDP of
Malaysia, GDP of USA, PPP of Indonesia and CAD of Indonesia. This
means that whenever there is an increase in any of these factors the
exchange rate of Indonesian rupiah will increase and vice versa.
• Factors that affect negatively : PPP of China, GDP of Indonesia, oil
prices, PPP of Malaysia, CAD of Malaysia, Interest rates of USA. This
means that whenever there is an increase in any of these factors
there will be decrease in the exchange rate of Indonesian Rupiah
and vice versa.
According to our study, GDP of China and GDP of Malaysia are the significant factors that affect
the exchange rate of Indonesian Rupiah-
• For every unit increase in the GDP of China, there will be a 1.0569 increase in the Rupiah
exchange value.
• For every unit increase in the GDP of Malaysia, there will be a 1.1338 increase in the Rupiah
exchange value.

GDP Of China, Malaysia and Indonesia.


References
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Edwards and Sahminan Sahminan (2008)
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Raja Masbar, Fajri, Muhammad Nasir - Doctoral Program of Economics Faculty of Economics
and Business of Syiah Kuala University, Darussalam-Banda Aceh
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Syarifuddin (Bank Indonesia, Indonesia)
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