Despite Bank Indonesia's (BI) continuous pledge to guard currency stability, the rupiah nose dived to the weakest level in 16 years, bringing the specter of the 1998 Asian financial crisis back into local policymakers' minds.
The rupiah on Monday recorded the steepest one-day decline in five months as it fell 1.9 per cent to 12,698 per dollar, the weakest close since August 1998, according to prices from local banks compiled by Bloomberg.
Other regional currencies also depreciated in line with the rupiah, which was battered by the combination of surging dollar demands and the broad-based capital outflows in Asian stock markets. Leading losses in Asia were stock markets in Malaysia, Thailand and Japan, whose stock markets fell by 3.1 per cent, 2 per cent and 1.6 per cent, respectively.
In Indonesia, foreign investors registered a net sell of Rp 828 billion (S$82.8 million) on Monday, causing the Jakarta Composite Index (JCI) to fall by 1 per cent to 5,108, the lowest level in almost a month.
BI spokesperson Peter Jacobs noted that regional currencies were hit by the reverse flows of capital, as many investors were now moving their US dollar assets to developed economies with better macroeconomic indicators, which promised safer outlook of investments.
"Bank Indonesia will not go against the market's flow and will perform a prudent, well-calibrated intervention on the rupiah," Peter said Monday in an interview at his Jakarta office.
"Investors don't need to collect dollars too aggressively because the pressure [on the rupiah] will ease in January, as we'll get more certainty on the future movement of the US interest rate, while domestic dollar demand - which now surges for yearend corporate payments - returns to normal," he explained.
Significant capital outflows were also recorded in the Indonesian bonds market, as foreign investors had reduced their holdings in the rupiah government bonds by Rp 11.2 trillion month-to-date, according to Finance Ministry data.
On Monday, the yield of the government benchmark 10-year bonds rose 23 basis point to 8.45 per cent, the highest level in two months. Bonds that have higher yields are valued in cheaper prices among investors.
"Foreign investors are exiting the local bonds market because of the rupiah depreciation, as the recent correction in currency has eroded their assets," said Adra Wijasena, a fixed-income analyst with Mega Capital Indonesia.
While acknowledging that the recent rupiah weakness might be inevitable, he argued that the central bank could actually do more in preventing the rupiah from falling too steeply. "BI should stabilize the rupiah at the 12,500 [per dollar] level a little longer, as it is some kind of a psychological threshold among bond investors," Adra said Monday.
Top officials from the US central bank would hold their Federal Open Market Committee (FOMC) meeting for the last time this year on Dec. 17-18, during which they are expected to give guidance on their interest rate outlook for 2015.
"Investors could be nervous ahead of the FOMC meeting this week," Chua Hak Bin, an economist with Bank of America Merrill Lynch, said on Monday. "Indonesian bonds and currency may stabilize or recover after the FOMC meeting, if the Fed does not surprise."
In addition to sentiment from the US, there was a "risk aversion" trend among investors in the financial markets, who moved to reposition their assets due to the plunging commodity prices such as oil, said Ho Woei Chen, an economist with the United Overseas Bank (UOB) in Singapore.