Bank Indonesia (BI) must take bold measures to halt the decline in the rupiah and regain investor confidence in the economy.
Analysts are hoping that the central bank's decision to increase the deposit rate might only be the beginning of a series of monetary tightening measures.
BI increased its overnight deposit facility rate (Fasbi) - the interest rate paid to local lenders for short-term deposits at the central bank - by 25 basis points to 4.25 percent from Wednesday, having kept it unchanged since August last year.
"The rise is a preemptive measure from Bank Indonesia to give a signal to the market that we are ready to respond whenever new developments kick in," Governor BI Agus Martowardojo told reporters in Jakarta on Wednesday.
Agus explained that BI increased the Fasbi rate to absorb excess liquidity in the market. Less liquidity would eventually lead to more anchored inflation expectations and firmer support for the rupiah.
Agus only took up his position a few weeks ago and today will be the first time he has taken the chair at BI's monthly board of governors meeting.
This meeting is thought to be crucial as the recent capital outflow has put great pressure on the rupiah.
"Further turbulence cannot be ruled out," Citi Research economist Helmi Arman wrote in a research note on Wednesday.