Although short-term capital inflows are useful to meet the short-term national financial requirement, they are also very volatile and vulnerable to sudden reversal. This is because they are sensitive to the changes in expectations and are often associated with irrational behaviour.
Sensitivity to expectations is currently clearly evidenced by the sensitivity of the rupiah towards changes in the risk appetite of global investors towards US-Dollar denominated debt instruments issued by developed countries, including Indonesia, through the global financial market. In the last two years, we have observed an improving positive relationship between the value of the rupiah and EMBIG spread fluctuations (Graph 4).