You can give this a Drop Shadow, but the rectangle will also have a shadow around it — that’s why you need to cut & paste the entire rectangle-plus-letter hole “inside” the copy of the original letter outline.

There is another way to knock-out anything (even “live” text), but it’s quite complicated — see http://indesignsecrets.com/turn-any-object-into-a-transparency-mask.php (and esp. Branislav Milic’s PDF in the comments below).

1.) make text frame.apply font
2.) create a custom gradient ,(note: you can use a preset gradient if you like. )that has a light tint of any color in the middle of two darker shades of that same color .
3.)apply custom gradient to the fill of the text
4.)duplicate text frame (alt drag the frame is my favorite way)
5.)remove the fill and apply a 1 pt stroke, using the darker shade of from the gradient from step 2.
6.) go and select the first frame, then in the file menu >object > feather, to the frame, like david has above, using .0625 for the width and 4% noise
7.)last but not least, move the frame with the stroke applied to the text on top of the feathered text frame…Viola editable inner glow …

By the way, you can make an “Inner Bevel Effect” by adding a second “Inner Shadow”.

1. Copy the Object Style “Box Inner Shadow” and change the “Drop Shadow & Feather” color for White [Paper] and the Mode for Normal. Name it Hi-Lite.

2. With the Selection Tool, select your box again / copy / Paste in Place / Cut. With the Selection Tool, select your box again / Paste Into. Click “Select Content” and selection your Hi-Lite “Object Style”.

3. With the Selection Tool and “Select Content” / “Select Container”, you can modify and position the two “Inner Shadow” at theire proper position.
With the Selection Tool, enlarge the left top corner of the “inner Shadow” to make the top and left shadow spread out. With the Selection Tool, enlarge the right bottom corner of the “inner Hi-Lite” to make the right and bottom Hi-Lite spread out.

“Select Content” / “Select Container” Trick :

With the Selection Tool, when you select your box and click the “Select Content” button in the Control palette, the “Select Content” button will dim and the “Select Container” will darken, and vice versa.

If you have 2 “inner”, “Select Content” will not dim, so if you click again, you will select the second “inner”. At that time, the “Select Content” will dim. You need to toggle betwen “Select Content” / “Select Container” to select the first one or the second “inner”.

1. Create 2 new color
Red fill: 15/100/100/28
Red stroke: 15/100/100/71

2. Create a new Object Style, call it “Box”, add these settings:
Fill : 15/100/100/28
Stroke: 15/100/100/71 – Weight: 3 pt – Type: Thick/Thin – Gap: None
Stroke & Corner Effects: Alignment_Outside – Corner Efects : Rounded_0.1667 in
Transparency: Mode_Normal

3. Create a new Object Style, call it “Box Inner Shadow”, add these settings:
Fill : None
Stroke: 15/100/100/71 – Weight: 11 pt – Type: Solid
Stroke & Corner Effects: Alignment_Outside – Corner Efects : Rounded_0.1667 in
Transparency: Normal
Drop Shadow & Feather : Mode_Multiply – Opacity_ 100 – X and Y Offset_0 in – Blur_0.5 in – Spread_20% – Noise_ 3% – Color_15/100/100/71

4. Create a box without any fill or stroke and apply the object style “Box”.

5. Copy the box and choose Edit > Paste in Place, choose Edit > Cut

6. Select your box and choose Edit > Paste Into, click the Select Content button in the Control palette and apply the object style “Box Inner Shadow”

Et Voila

If you modify the box, do not forget to click the “Fit Content to Frame” button in the Control palette.

You can apply that to Text boxes but if you add any text, it will take the box Object Style. Too bad.

By the way, you can make an “Inner Bevel Effect” by adding a second “Inner Shadow”.

1. Copy the Object Style “Box Inner Shadow” and change the “Drop Shadow & Feather” color for White [Paper] and the Mode for Normal. Name it Hi-Lite.

2. With the Selection Tool, select your box again / copy / Paste in Place / Cut. With the Selection Tool, select your box again / Paste Into.

3. With the show Frame Edges “on” and the Direct Selection Tool, you can “not easily” position the two “Inner Shadow” at the proper position.

Full le Fun.

Hey! It’s Friday !

First, the letter converted to outlines with a rectangle around it, then the result of “knocking out” the letter from the rectangle and giving it a drop shadow. Finally, pasting that result inside the original shape.