The Indonesian stock market is rallying as capital rotates into previously underperforming shares, coupled with easing concerns over the nation's fiscal health, bringing the benchmark index to the brink of a bull market.

On Thursday, the Jakarta Composite Index rose as much as 1.5%, extending its rebound from early June lows to 20%. Commodity leaders Ammann International Resources and Barito Renewables Group were key contributors driving the index higher.

Previously one of the world's worst-performing major markets this year, sentiment in Indonesia is gradually improving. A combination of factors, including a retreat in international oil prices, the central bank's cumulative 50-basis-point rate hikes in June, and S&P Global Ratings' decision to maintain Indonesia's sovereign credit rating and outlook, have collectively stabilized the market.

"I believe the low point on June 8th has provided support," said Mohit Mirpuri, a partner at Singapore's SGMC Capital. "Current market pricing is gradually reflecting expectations of economic stabilization rather than continued deterioration."

He added that overseas institutional allocations to Indonesian stocks are generally low. "The cost of missing out by waiting for confirmation of the trend is now higher than the potential risk of deploying capital in tranches ahead of time."

Traders noted that the current rally is largely attributed to a series of measures introduced by the Indonesian government to boost confidence in the sluggish domestic capital market. In a surprise move on Wednesday, the central bank held its benchmark interest rate steady at 5.75% and introduced several stimulus policies aimed at attracting foreign capital inflows and supporting the rupiah. Concurrently, the government is tightening fiscal discipline by scaling back a previously massive free student lunch program.

On Thursday, the rupiah appreciated over 1% from its historic low in early June, while the yield on 10-year Indonesian government bonds fell more than 10 basis points from the three-year highs touched in late June. The Jakarta Composite Index has gained 14% this month, outperforming major global benchmark indices.

However, the sustainability of this rebound remains uncertain. Despite the recent gains, the index is still down about 26% for the year. Concerns persist regarding market transparency and doubts about President Prabowo's economic policy direction. MSCI will make a final decision in November on whether to downgrade Indonesian stocks to frontier market status, while S&P Dow Jones Indices has also signaled a potential reclassification of the Indonesian market.

Fund flow data indicates global asset managers remain cautious. Foreign investors have been net sellers of Indonesian stocks across daily, weekly, monthly, and year-to-date timeframes. While net foreign outflows this month stand at $161 million, the selling pressure has eased compared to the over $1 billion outflow in June.

Rajiv Batra, Co-Head of Global Emerging Market Equity Strategy at JPMorgan, stated in an interview that the market has not yet fully priced in the various reform measures the government has implemented to avoid a rating downgrade, and that long-only institutions are significantly underweight Indonesian equities.

He added that once the market fully prices in the expectation of "Indonesia retaining its emerging market index status" and MSCI acknowledges the reform measures from policymakers, "foreign capital will return to Indonesia, and the sustainability of the current stock market rally will be significantly enhanced."