Bank Indonesia faces mounting pressure to raise interest rates on Wednesday as economists revise their forecasts after global index provider MSCI warned it may downgrade the country's stock market from emerging-market status, setting off a selloff in stocks and the rupiah.
Citibank now expects a pre-emptive 50 basis-point increase to 6.25%, abandoning its earlier call for no change. Capital Economics and Permata Bank expect a 25 basis-point hike to 6%. The central bank has held its benchmark seven-day reverse repurchase rate at 5.75% since June.
MSCI said Friday it is considering moving Indonesia to "standalone" from the emerging-market status it has held since 1989, causing the Jakarta Composite Index to suffer the worst two-day sell-off recorded, before recovering about 3% Tuesday after authorities announced steps to improve market transparency and price discovery, including expelling tightly held companies from the flagship index.
Meanwhile, rupiah weakened to 18,030 per dollar on Tuesday, near its June record low, falling about 8% this year.
"Not delivering a rate hike [on Wednesday] would run the risk of disappointing investors and fueling further downward pressure on the currency," said Jason Tuvey, deputy chief emerging markets economist at Capital Economics. "A decision to hold rates on Wednesday could also revive concerns among investors that Bank Indonesia is kowtowing to political pressure."
Citi's Helmi Arman said a hike would aim to stop equity outflows spilling into bonds and prompting capital flight by domestic investors. He expects it to be a "one-off" followed by other support such as government foreign-currency borrowing or another round of bilateral currency swaps with foreign central banks.
The central bank has already raised rates by a combined 100 basis points since May. Headline inflation quickened to a three-month high of 3.28% in September, within the 1.5%-3.5% target range, while core inflation eased to 2.84%. The governor, Destry Damayanti, has said foreign-exchange reserves of $146.3 billion at the end of September would be adequate to stabilize the rupiah.
Market integrity in question
"Market confidence can deteriorate much faster than economic fundamentals," said Josua Pardede, chief economist at PT Bank Permata, estimating that foreign investors have net sold about $5 billion of Indonesian stocks this year. The risk is that foreign equity withdrawals could further weaken the rupiah and trigger selling in government bonds, he added.
The biggest risk is not simply losing Emerging Market status, but letting doubts about market integrity become a lasting increase in Indonesia's cost of capital.Josua PardedeChief economist, PT Bank Permata
An MSCI downgrade could force $3 billion to $5 billion of passive outflows, with another $15 billion of actively managed foreign money exposed to reassessment, he estimates. Pardede expects the market adjustment may come in stages, from precautionary selling through the first half of 2027 and mechanical selling if MSCI confirms the move by June.
"BI can provide liquidity and reduce excessive volatility, but only credible market-governance reforms can address MSCI's fundamental concerns," he said, calling for credible free-float data, ownership disclosure and transparent engagement with international institutional investors.
"The biggest risk is not simply losing Emerging Market status, but letting doubts about market integrity become a lasting increase in Indonesia's cost of capital."