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span class="inline inline-right">AntaraIndonesia’s beleaguered financial markets showed signs of recovery on Tuesday as renewed hope that European leaders would soon solve the region’s debt crisis prompted massive buying, pushing up the local exchange’s main price index to rebound nearly five percent in active trading.

The benchmark stock index jumped 4.76 percent or almost 158 points to 3,473.94 on signs of the return of foreign funds. For the first time in the last two weeks, foreign investors, who control more than half of the publicly traded stocks on the Indonesia Stock Exchange (IDX), made Rp 42 billion worth of net purchases.

The rupiah appreciated 1.7 percent to Rp 8,905 against the US dollar at 4:45 p.m. in Jakarta, according to prices at local banks, minimizing this month’s 4.2 percent loss.

“The appetite for risk is coming back because of the move by the European Central Bank,” Bambang Eko Joewono, head of the global-markets division at United Overseas Bank (UOB) Indonesia, said as quoted by Bloomberg. “That creates positive sentiment for the rupiah.”

The European Central Bank reportedly planned a meeting next week to consider measures to boost cash held in the region’s banks through the purchase of bonds backed by loans, analysts said.

Previously, investors worldwide dumped risky assets, including those in Indonesia, amid mounting concerns over European debt problems and the economic slowdown in the US.

The Jakarta Composite Index (JCI) dropped more than 20 percent after reaching its 4,193 peak early in August, when international fund managers dumped more than Rp 13 trillion worth of Indonesian shares, putting heavy pressure on the rupiah.

In a recent report, Citi Investment Research and Analysis confirmed that “the abrupt unwinding of overcrowded foreign positions in money and bond markets” was the reason the rupiah was dragged down. Like many other analyses, Citi also saw the high volatility and its associated risks to the stock market and the rupiah.

“Although the outflows so far have mostly been concentrated at the short end, this could spread quite easily if tensions in the global market escalate as we expect,” Citi reported, cutting back its rupiah forecast to Rp 9,300 looking ahead three months, and Rp 8,900 in six to 12 months’ time.

Bank Indonesia (BI) director for economic and monetary policy research Perry Warjiyo said the rupiah is still the best performing major currency in the region despite the sharp drop over the last several days. The Indonesian currency has appreciated almost 0.7 percent so far this year, according to central bank data. “By comparison, our rupiah is relatively more stable than the region’s [other] currencies.”

BI has been intervening in the currency and government bond markets by purchasing both rupiah and bonds to stem volatility and avoid further plunges that could destabilize the country’s economy.

A weaker rupiah could disrupt people’s purchasing power, as well as the government’s, and companies’ ability to pay back foreign borrowings, while lowering government bond prices — which means a spike in the yield — could result in soaring borrowing costs for the government and local firms. The yield on 10-year government debt fell 1.5 basis points on Tuesday to 7.20 percent, after spiking dozens of basis points previously, as foreign ownership in government bonds slid Rp 28.42 trillion from Sept. 9 to 26 amid massive sell-offs.