According to the World Bank data, in 2020, Indonesia’s interest rate was 10.05 percent, while in India, it was 4.38 percent.

a. Would you expect the Indonesian rupiah to appreciate or depreciate against the Indian rupee? By how much?

b. Suppose that an Indonesian-based investor has a choice between a one-year bond issued by an Indonesian bank and an Indian bank.

We assume that the bonds are similar in all aspects for the sake of simplicity.

The Indonesian investment is in rupiah (IDR) and pays 2 percent, while the Indian investment is in Indian rupees (INR) and pays 2.5 percent. The investor wants to place IDR2,000 in one-year bonds. Suppose the IND–INR spot rate is 1.3 today and 1.2 a year from now. What is the investor going to choose?