Global index provider MSCI has warned it may move Indonesia's stock market out of the emerging market category, triggering a selloff in equities and the rupiah and raising pressure on Bank Indonesia to hike interest rates ahead of its Oct 21 policy meeting. According to CNBC, Citi dropped its previous forecast of unchanged rates and now expects a precautionary 50 basis point hike to 6.25%; Capital Economics and Indonesia's Permata Bank expect a 25 basis point hike to 6%. Bank Indonesia's seven-day reverse repo rate has been held at 5.75% since June, after a cumulative 100 basis points of hikes since May.
MSCI said on Oct 16 it was considering reclassifying Indonesia from emerging market status, which it has held since 1989, to "standalone market" status, after which the Jakarta Composite Index posted its largest two-day drop on record. Authorities announced measures to improve market transparency and price discovery, including removing companies with highly concentrated ownership from the flagship index, and the index rebounded about 3% on Oct 20. The rupiah fell to 18,030 per dollar that day, near the record low set in June, and has depreciated about 8% year to date. Permata Bank chief economist Josua Pardede estimated that in the event of a downgrade, passive fund outflows could reach $3 billion to $5 billion, with another $15 billion in actively managed foreign capital facing reassessment.