The rupiah slid 1.4 per cent, the most since Dec 15, to close at 13,788 a US dollar, prices from local banks show. The currency had earlier reached 13,831, the weakest level since August 1998.
The yield on sovereign bonds due September 2026 rose 20 basis points to 8.79 per cent, said the Inter Dealer Market Association.
"We will continue to guard government bonds. We will work with Bank Indonesia. The main thing is we will take action," Finance Minister Bambang Brodjonegoro said.
The bond yield rose as the rupiah fell by nearly 2 per cent against the greenback as China, the nation's largest export market, devalued its currency. Foreign investors hold 38 per cent of Indonesian government bonds.
"This China devaluation can make the (US Federal Reserve) hesitate (to raise interest rates). If it increases the rate, (the US dollar) will be even stronger against other currencies," the minister said. "It will increase global uncertainties."
Earlier, central bank governor Agus Martowardojo said the rupiah's exchange rate has "overshot" and the Indonesian currency is currently undervalued. He said Bank Indonesia has been in the market and will stay there to guard the currency against volatility.
The rupiah is down more than 10 per cent this year, the worst-performing currency in Asia after Malaysia's ringgit.
Growth has continued to slide in Indonesia, falling to a six-year low of 4.67 per cent in the second quarter, with the government of President Joko Widodo being criticised for a series of policy flip-flops.
Mr Widodo replaced major economic ministers in a Cabinet reshuffle yesterday, less than a year into his term. His new Coordinating Minister for Economics Darmin Nasution said it is important to guard capital inflows to keep the rupiah stable. The Trade Minister is prominent private equity executive Thomas Lembong.
Analysts welcomed the news, particularly the decision to appoint Mr Nasution who is seen as a safe pair of hands and a reformer.