Analysis of the Relationship Between the Rupiah Exchange Rate and the Jakarta Composite Index
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Elly Rahmawati*
Financial markets across the globe grow ever more interconnected, and as a small open economy, Indonesia is no exception, making the Rupiah’s exchange rate against the US Dollar one of the macroeconomic indicators most closely watched by market participants and a key determinant of conditions on the Indonesia Stock Exchange. This study examines the relationship between the Rupiah exchange rate against the US Dollar and the movement of the Jakarta Composite Index (JCI) on the Indonesia Stock Exchange. The method used is library research with a descriptive qualitative approach through tracing and synthesizing relevant national and international scientific articles. The results show that the relationship can be explained through two main approaches: the flow-oriented model, in which the exchange rate affects stock prices through trade competitiveness and firm performance, and the stock-oriented model (portfolio balance approach), in which portfolio capital flows link the two variables. The majority of empirical studies in Indonesia find that Rupiah depreciation has a negative and significant effect on the JCI, although several inconsistent findings exist due to differences in observation periods, analytical methods, and macroeconomic conditions. These findings imply the importance of exchange rate stability for the monetary authority and the need for investors to consider exchange rate risk in capital market investment decisions.
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