Controlled Inflation Becomes Key to Strengthening Indonesia's Sharia Stock Index Amid Industrial Transformation

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FORMOSA NEWS - Jakarta - Stability in inflation at a moderate level has proven to be a crucial factor supporting the performance of the national Sharia capital market. A recent study conducted by academics from Syarif Hidayatullah State Islamic University Jakarta reveals that inflation has a positive and significant effect on the Indonesian Sharia Stock Index (ISSI) during the 2019–2024 period.

The research, authored by Roikhan Mochamad Aziz, Siti Umi Nurbaidah, Dede Nurdiansyah, Ali Maskur Hasan, and Muhammad Al Fath, highlights how industrial downstreaming policies, global Sharia index movements (IMUS), and macroeconomic variables interact to influence the Sharia stock market. These findings offer a fresh perspective for investors and policymakers as the government continues its structural transformation of the national economy.

Downstreaming: A Long-Term Investment Requiring Time

Indonesia's downstreaming policy, aggressively implemented since the 2020 nickel ore export ban, represents a strategy to shift the nation from raw material dependency to high-value processing industries. This initiative targets sectors such as nickel, bauxite, tin, and copper to catalyze electric vehicle battery ecosystems and stainless steel production.

While downstreaming is theoretically expected to boost the performance of linked issuers, this study found that the policy’s direct impact on ISSI has not been statistically significant in the short term. This is attributed to the capital-intensive nature of downstream industries and the long lead times required for infrastructure, such as smelters, to translate into massive corporate profits.

The Surprising Role of Inflation

One of the most critical findings involves the role of inflation. Contrary to conventional financial literature that often links high inflation to pressure on stock prices, this research proves that moderate inflation—averaging 3% to 4% during the study period—actually correlates with the strengthening of ISSI.

"Moderate inflation often reflects strong domestic demand and healthy economic growth—conditions that support the performance of issuers," the researchers noted. Furthermore, from an Islamic economic perspective, price stability is a prerequisite for a fair investment environment, aligning with the principle of hifzh al-mal or the preservation of wealth.

Global Sharia Market Integration

The research also dissected the relationship between the United States Sharia market via the Dow Jones Islamic Market US (IMUS) and the domestic market. It was discovered that IMUS does not affect ISSI directly, but rather through inflation as a significant mediating variable.

Increases in the global Sharia index often reflect global economic expansion, which drives demand for Indonesian export commodities, thereby creating healthy inflationary pressures. This inflation is then responded to positively by the domestic Sharia capital market.

Implications for Investors and Government

Based on the study's results, several strategic recommendations have been proposed:

• For the Government: Strengthen downstream policy frameworks with targeted fiscal incentives, such as tax holidays or energy subsidies, to accelerate the return on investment for issuers.
• For Bank Indonesia: Maintain inflation stability at a moderate level (3–4%), as it has been proven to support Islamic capital market performance.
• For Investors: Moderate inflation can be utilized as a positive indicator for Sharia stock market investment decisions.
• For Market Analysis: Monitor downstream development as a long-term fundamental factor, even if its direct short-term impact on stock prices remains limited.

This research utilized Path Analysis with monthly secondary data from official institutions including Bank Indonesia and the Ministry of Industry.

Author Profiles:

• Roikhan Mochamad Aziz: Lecturer and researcher at Syarif Hidayatullah State Islamic University Jakarta, expert in Islamic economics and finance.
• Siti Umi Nurbaidah: Researcher focusing on Islamic financial management at Syarif Hidayatullah State Islamic University Jakarta
• Dede Nurdiansyah, Ali Maskur Hasan, & Muhammad Al Fath: Research team members specializing in the integration of industrial policy and Sharia capital markets.

Source Research: Aziz, R. M., Nurbaidah, S. U., Nurdiansyah, D., Hasan, A. M., & Fath, M. A. (2026). The Effect of Downstreaming, IMUS, and Inflation on Indonesia's Sharia Stock Index. Indonesian Journal of Advanced Research (IJAR), Vol. 5, No. 3, 321-342. DOI: https://doi.org/10.55927/ijar.v5i3.16263.

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