Indonesia is facing a tough political climate, as it grapples with protests over rising living costs, lawmakers' pay and police violence, hurting investor sentiment in Southeast Asia's largest economy.

The Jakarta Composite Index fell as much as 3.6% on Monday, while the Indonesian rupiah depreciated to 16,500 against the U.S. dollar — its weakest intra-day level since Aug. 1 — according to LSEG data.

While the violence and protests have rattled investors confidence, they are unlikely to challenge the underlying growth story for Indonesia, several market watchers said.

The latest selloff was primarily "sentiment driven," as investors reacted to developments over the weekend, said Howe Chung Wan, managing director and head of Asian fixed income at Principal Fixed Income.

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