Bank Indonesia faces mounting pressure to raise interest rates on Wednesday after MSCI warned it may downgrade Indonesia's stock market from emerging-market status. The warning triggered a selloff in stocks and the rupiah. Citibank now expects a pre-emptive 50-basis-point increase to 6.25%, abandoning an earlier forecast of no change. Capital Economics and Permata Bank expect a 25-basis-point increase to 6%. Bank Indonesia has held the benchmark seven-day reverse repurchase rate at 5.75% since June.
MSCI said Friday that MSCI is considering moving Indonesia from emerging-market status to standalone status. Indonesia has held emerging-market status since 1989. The warning caused the Jakarta Composite Index's worst recorded two-day selloff. The index recovered about 3% Tuesday after authorities announced measures to improve market transparency and price discovery. The measures include expelling tightly held companies from the flagship index. The rupiah weakened to 18,030 per dollar on Tuesday, near the record low reached in June, and has fallen about 8% this year.
Jason Tuvey, deputy chief emerging markets economist at Capital Economics, warned that not raising rates on Wednesday could disappoint investors and increase downward pressure on the currency. Tuvey said holding rates could also revive investor concerns that Bank Indonesia is yielding to political pressure. Citi's Helmi Arman said a rate increase would aim to prevent equity outflows from spreading to bonds and prompting capital flight by domestic investors. Arman expects a one-off increase followed by other support, such as government foreign-currency borrowing or another round of bilateral currency swaps with foreign central banks.
Bank Indonesia has already raised rates by a combined 100 basis points since May. Headline inflation accelerated to a three-month high of 3.28% in September, within the target range of 1.5% to 3.5%. Core inflation eased to 2.84%. Bank Indonesia Governor Destry Damayanti has said foreign-exchange reserves of $146.3 billion at the end of September would be adequate to stabilize the rupiah.
Josua Pardede, chief economist at PT Bank Permata, said market confidence can deteriorate much faster than economic fundamentals. Pardede estimated that foreign investors have net sold about $5 billion of Indonesia's stocks this year. Pardede warned that foreign equity withdrawals could further weaken the rupiah and trigger selling in government bonds. Pardede estimated that an MSCI downgrade could force $3 billion to $5 billion of passive outflows. Pardede estimated that another $15 billion of actively managed foreign money would be exposed to reassessment.
Pardede expects the market adjustment may occur in stages, beginning with precautionary selling through the first half of 2027. Pardede expects mechanical selling if MSCI confirms the move by June. Pardede said Bank Indonesia can provide liquidity and reduce excessive volatility, but only credible market-governance reforms can address MSCI's fundamental concerns. Pardede called for credible free-float data, ownership disclosure and transparent engagement with international institutional investors. Pardede said the biggest risk is that doubts about market integrity become a lasting increase in Indonesia's cost of capital, rather than simply losing emerging-market status.
Bank Indonesia Under Pressure to Hike Rates Amid MSCI Downgrade Threat
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Summary
Bank Indonesia faces mounting pressure to raise interest rates after MSCI warned of a potential downgrade of Indonesia’s stock market status. The threat triggered a sharp selloff in stocks and the rupiah, which weakened to 18,030 per dollar. Citibank now forecasts a 50-basis-point hike to 6.25%, while others expect a 25-basis-point increase. The central bank has held rates at 5.75% since June. The Jakarta Composite Index fell sharply but recovered 3% after authorities pledged to boost market transparency. With interest rates in focus, altcoins to watch may see renewed attention as investors seek alternatives.
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