Why BI Considers the Rupiah Exchange Rate Undervalued

Bank Indonesia Governor Perry Warjiyo stated that the rupiah exchange rate, currently holding at around 17,000 per US dollar, is undervalued. Undervalued refers to a situation where the currency’s value is lower or cheaper than its fundamentals, particularly when economic performance remains strong.

“We emphasise that the current rupiah exchange rate is undervalued compared to its fundamentals,” Perry said during a press conference following the Board of Governors’ meeting on Wednesday, 22 April 2026.

As of Monday morning, 27 April 2026, the rupiah was still hovering above 17,200 per US dollar. Last week, it even plunged to 17,315, marking an all-time low.

So why is the rupiah experiencing undervaluation? Chief Economist at Permata Bank, Josua Pardede, explained that there is a wide gap between the current market rate of the rupiah and its fair value based on economic fundamentals.

Josua measures the rupiah’s fundamental value using fair value indicators. According to fair value calculations, 1 US dollar was around Rp16,407 in March 2026. At that time, the rupiah’s real effective exchange rate (REER) stood at 93.5. Thus, the rupiah was deemed 3.1% cheaper than its fair value, or about 500 points from the March average position.

However, with the rupiah now trading around 17,295–17,300 per US dollar, the gap against the fair value of Rp16,407 has widened to about 5.4%, or roughly 890 per US dollar.

Using a more conservative approach, Josua estimates the current fundamental value of the rupiah should be around 16,300–16,600 per US dollar. Thus, the distance between the actual rate and the current level has reached 4–6%.

Nevertheless, according to Josua, an undervalued rupiah does not automatically lead to an easy strengthening. “The market is currently not only assessing fundamentals but also risks,” he said.

The rupiah’s weakening is due to a combination of high oil prices, tensions in the Middle East, domestic dollar needs for imports and dividend repatriation, as well as concerns over fiscal burdens from energy subsidies. On Thursday last week, the rupiah fell above 17,300, coinciding with persistently high global oil prices around US$104 per barrel. This was accompanied by seasonal dollar demand and investor worries about the impact of oil prices on energy subsidies.

According to Josua, Bank Indonesia’s claim that the rupiah is currently undervalued is quite reasonable but must be read carefully. Although the rupiah appears too cheap in real terms, the market is still pricing in significant risks. “The market is still demanding a large risk premium before it is willing to bring the rupiah back to its fundamental range.”