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t must have been a heart-wrenching experience for stock market investors in Indonesia. Since May 22, when the Jakarta Composite Index (JCI) reached its historic level of 5208 through June 11, a total of Rp 545 trillion (US$55.04 million) has been wiped off the market capitalization of listed companies. On June 11, market capitalization lost Rp 152 trillion in one day.

Up to May 22 this year, the JCI had gained 21 percent, well above the overall gain of 13 percent in 2012 and outpacing broad emerging indexes by a pretty wide margin. But within two weeks, the JCI lost 11.5 percent. Through June 11, foreign investors sold their stocks for 13 straight days, withdrawing a total of US$1.9 billion from stocks and local currency bonds.

Even before the dramatic fall in stock prices, investors have been uncomfortable with the continuing depreciation of the rupiah, because it has eroded the dollar value of their financial assets. The fall of global stock prices triggered them to accelerate their exit from Indonesia's market.

This sudden capital outflow has exacted a further toll on the rupiah. The rupiah, which has been depreciating lately and has been hovering at Rp 9,900 per US dollar, suddenly crossed the Rp 10,000 mark on June 10. One-month, non-deliverable contracts jumped to Rp 10,412 against the US dollar, according to Bloomberg.

The global stock sell-off that spread to many parts of the world earlier this month has, like a hurricane, left a trail of damaged financial markets in its wake.

It all began when the market was rattled by statements from the US Federal Reserve, which gave the impression that it would scale down its government bond-purchasing program sooner than expected.

The Fed's bond-purchasing program has injected huge liquidity into the market, but with ultra-low interest rates at home, these funds found their way into emerging markets to seek better yields, boosting the value of financial assets in these countries.

Although the shift in Fed policy is not imminent, speculation and an overreaction by investors around the globe have generated much turmoil in the capital market. Indonesia, once again, is realizing how a sudden U-turn of capital flow can hurt.

The fact that this is happening amid some fairly grave domestic economic issues facing the Indonesian government has only compounded the problems. The deficit in the country's current account, combined with uncertain government policy on increasing the price of subsidized fuel, has undermined market confidence in the rupiah.

The current account has been in deficit for six consecutive quarters, with an average deficit of $1.8 billion a month over this period. At the same time, foreign direct investment (FDI) inflows could only finance around 60 percent of the deficit, leaving the balance of payments relying on the portfolio inflows.

And because the portfolio inflows are volatile, the risk that the continuing current account deficit will deplete foreign exchange (forex) reserves is great. The market will be watching closely how the government sets about attracting portfolio investment

In an attempt to prevent the further depreciation of the rupiah, Bank Indonesia (BI) has undertaken a number of initiatives to increase the supply of US dollars. In 2011, it introduced a regulation that required exporters and debtors to withdraw any funds parked overseas and deposit them in Indonesia-based banks.

Then in June 2012, BI introduced a weekly US dollar term-deposit auction as a new instrument in the foreign exchange market in
a bid to retain dollars in the domestic banking system. But these
measures seem to have been ineffective, and not entirely welcomed by businesses.

Large oil and gas contractors did not comply with the rulings, citing legal provisions in their production sharing contracts. The measures, however, failed to arrest further rupiah depreciation. BI was forced to resort to market intervention, but this policy has proved costly as it has depleted BI's reserves by $4 billion this year.

Last, on June 11, BI raised the overnight deposit facility rate, known as Fasbi, by a quarter-percentage point to 4.25 percent. It was a preemptive measure by BI since it was taken without waiting for a scheduled BI meeting that would discuss the reference rate. The increase in the Fasbi rate signaled the start of policy tightening and confirmed BI's commitment to tightening bias, given the expectations of higher inflation ahead.

What BI is trying to do is to instill some confidence in the rupiah following the panic in the market during the past several days. BI wants to portray itself as being willing to be ahead of the curve. The Fasbi is in many ways more important than the reference rate because it represents the floor on interbank borrowing costs. Since banks have no incentive to charge below what they earn from BI, namely from the Fasbi rate for their interbank lending, the Fasbi rate has a great influence on interbank rates and the rest of the yield curve.

The question then is, how effective is the Fasbi rate rise in avoiding further speculation on the rupiah and addressing the currency's high volatility? It is too early to tell, but one day after the measure was announced, one-month, non-deliverable forwards gained 0.5 percent to 10,227 per US dollar.

The contract touched Rp 10,412 the previous day. Rupiah forwards are now looking for further losses, suggesting that the problem may continue in the near term.

And even if it does not, investors will note that the currency's implied volatility has moved sharply higher, suggesting that no matter what the outcome of government policy over the next few weeks, it could be choppy times for the financial market in Indonesia.

BI has done its part in calming and stabilizing the financial market. However, due to the severity of the problems, BI policy instruments may not be enough. Now it is the government's turn to act swiftly and responsibly to address fiscal and other policy issues to support BI's actions. Without firm and credible policies from the government, BI's measures will not produce credible results.

The writer is an economist and the views expressed are his own.