Indonesia's financial markets rebound after historic lows amid confidence crisis

Indonesia's financial markets have been gripped by dramatic volatility in early June 2026, presenting a confusing and tense picture for investors. On June 8, the Indonesian rupiah plunged past 18,100 per U.S. dollar, marking its weakest point in history and losing nearly nine percent of its value year-to-date, making it one of Asia's worst performers. Simultaneously, the Jakarta Composite Index (IHSG) hit an annual low of around 5,317, a staggering 35 percent drop in six months, briefly becoming the world's worst-performing stock exchange.

However, a swift reversal occurred on June 9 and 10. The IHSG surged by 7.57 percent, followed by another 2.71 percent gain to reach 5,902, while the rupiah recovered to around 17,900 per dollar. This dramatic turnaround was attributed to a surprise 25 basis point increase in the BI Rate to 5.50 percent during an unscheduled meeting and discussions about state-owned enterprise stock buybacks.

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The market we are facing now is only a yellow light, not a red light.

Despite the rebound, economists caution that the crisis is far from over. A forum of economics professors concluded that the situation is still a "yellow light," not a "red light." While the banking sector's foundation remains stable, inflation is controlled, and foreign exchange reserves are adequate for about six months of imports, the core problem is a "crisis of market confidence," not a full-blown economic crisis like in 1997/98. The recent gains are seen as a "relief rally," with underlying anxieties about capital outflow and fiscal risk premiums persisting.

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The two-day rebound should be interpreted more as a relief rally: panic has subsided for a moment, but the source of anxiety has not disappeared.

The root of the turmoil lies in capital flows. Foreign investors sold off shares heavily, with net sales exceeding 1 trillion rupiah in a single day in early June, driven by concerns over fiscal policy direction, central bank independence, and capital market transparency. Downgraded outlooks from Moody's and Fitch further worsened market sentiment. This capital outflow directly pressures the rupiah, increases the cost of imported raw materials, and negatively impacts the real economy. Industries reliant on imported components face rising production costs, squeezed margins, and declining productivity.

The financial instability has begun to spill into the productive economy. Starting June 10, following a surge in global oil prices due to Middle East conflict, prices for non-subsidized fuel saw significant increases. Pertamax (RON 92) rose 32 percent to Rp16,250 per liter, and Pertamax Green 95 increased by nearly 32 percent to Rp17,000 per liter. The government has maintained prices for Pertalite and Biosolar to protect consumers.

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Capital outflow is not just a number on the stock exchange screen; it puts pressure on the rupiah, increases the cost of imported raw materials, and ultimately erodes the real sector.