The Influence of Interest Rates, Inflation and Foreign Exchange Reserves on the Rupiah Exchange Rate

Abstract

• Purpose: This study aims to analyze the influence of interest rates, inflation, and foreign exchange reserves on the Indonesian rupiah exchange rate during the period 1991–2023.
• Design/methodology/approach: This research employs a quantitative approach using secondary time-series data obtained from the World Bank. Statistical analysis is conducted to examine the relationship between interest rates, inflation, and foreign exchange reserves as independent variables and the rupiah exchange rate as the dependent variable.
• Findings: The results indicate that approximately 82.12% of the variation in the rupiah exchange rate can be explained by the independent variables, as reflected by the R-squared (R²) value of 0.821163. Interest rates do not show a statistically significant effect on the exchange rate (p-value = 0.5446). Inflation shows a p-value of 0.0824, indicating a potential influence but not statistically significant. In contrast, foreign exchange reserves have a significant effect on the exchange rate with a p-value of 0.0000, supporting Hypothesis 3 (H3). Additionally, the overall model is statistically significant as indicated by the Prob(F-statistic) value of 0.000000.
• Research limitations/implications: This study focuses only on three macroeconomic variables—interest rates, inflation, and foreign exchange reserves—so other internal and external factors that may influence exchange rate fluctuations are not included. Future research is recommended to incorporate additional variables and explore broader macroeconomic dynamics.
• Practical implications: The findings highlight the important role of foreign exchange reserves in maintaining the stability of the rupiah exchange rate. These results provide valuable insights for policymakers, particularly in designing effective monetary policies to support currency stability and economic resilience.
• Originality/value: This research contributes to the literature on Indonesia’s macroeconomic dynamics by providing long-term empirical evidence (1991–2023) on the relationship between key macroeconomic indicators and the rupiah exchange rate.
• Paper Type: Research Paper

Keywords: Exchange Rate; Interest Rates; Inflation; Foreign Exchange Reserves; Regression Analysis.