Indonesia’s Financial Markets and Monetary Policy Dynamics Amid the COVID-19 Pandemic

We discuss the impacts of the COVID-19 pandemic on Indonesia’s financial markets and monetary policy dynamics. We explore five types of financial markets in Indonesia: (1) the Rupiah (IDR) interbank money market; (2) the US Dollar (USD) interbank money market; (3) government conventional bond (SUN) markets; (4) the stock market; and (5) the USD/IDR spot market. We examine Bank Indonesia’s (BI)'s three monetary policy instruments: (1) BI 7-day Reverse Repo Rate (the policy rate); (2) minimum reserve requirement ratios for banks (GWM); and (3) BI’s monetary operations. We find that several policy instruments have significant impacts on specific financial markets before and during the pandemic, i.e., the policy rate on the IDR and USD interbank money market, the IDR GWM on the medium-term SUN market, and the foreign exchange (FX) GWM on the FX market. We also find that the COVID-19 pandemic strengthened the impacts of BI’s policy instruments on particular financial markets during the pandemic than the pre-pandemic period. We suggest BI continues to maintain the stability of financial markets to support the government efforts to restore the economy from the fiscal side.