Indonesia battles to stabilize market after MSCI threat

By the Editorial Team · Wednesday, October 21, 2026

Indonesia’s stock market rebounded 5.3% after two days of sharp losses triggered by MSCI’s warning of a possible downgrade from "emerging market" to "standalone" status, which could prompt significant passive fund outflows. In response, the Indonesia Stock Exchange will exclude stocks with concentrated ownership from its benchmark index to improve transparency and address MSCI’s concerns, aiming to stabilize investor confidence.

Indonesian equities rebounded on Tuesday following sharp losses over the previous two sessions triggered by a warning from index provider MSCI about a possible downgrade of the country’s market classification. Jakarta’s benchmark index rose 5.3 percent after falling to a six-year low earlier, having lost nearly 15 percent over Friday and Monday. The index has declined roughly 40 percent so far this year, making it one of the worst performing markets globally.

The selloff was prompted by MSCI’s announcement on Friday that Indonesia faces reclassification from an "emerging market" to a "standalone" market, a more severe downgrade than initially anticipated. MSCI cited concerns including Indonesia’s failure to enhance ownership transparency and limit coordinated trading among investors. The change threatens to trigger significant outflows from passive investment funds that track MSCI indexes, further destabilizing the market.

Relegation to "standalone" status would constitute a setback for Southeast Asia’s largest economy, raising investor worries about the country’s fiscal discipline and the independence of its central bank under President Prabowo Subianto. Foreign investors have already withdrawn close to $5 billion from Indonesian equities this year. Analysts from Goldman Sachs estimate that an MSCI removal could prompt passive funds to pull out an additional $5.6 billion.

In response, the Indonesia Stock Exchange (IDX) announced after a meeting with MSCI that it would exclude stocks with a high concentration of ownership by any single person or entity from its benchmark index. This measure, representing about 18 percent of the index’s value, aims to improve market transparency and address investability concerns. IDX President Director Jeffrey Hendrik said the decision was made to present a more accurate reflection of market movements.

Some market participants see this as a positive step. Gary Tan, portfolio manager at Allspring Global Investments, commented that excluding closely held stocks could ease some concerns among investors, though successful implementation will be critical given potential resistance within Indonesia. He noted that the greatest risks to investment flows might now come from active, rather than passive, funds.

The rupiah weakened amid the market turmoil, hovering near a record low of 18,190 per U.S. dollar recorded in June, despite a modest strengthening to 17,980 on Tuesday. Indonesia’s central bank is expected to maintain interest rates during a policy meeting on Wednesday, though some economists suggest a rate hike may be considered to support the currency.

From a credit rating standpoint, Fitch Ratings director George Xu noted that while the MSCI downgrade and associated selloff underscore risks identified earlier in the year, they are not expected to have immediate material implications for Indonesia’s sovereign credit rating. However, he acknowledged that sustained external pressures could lead to higher borrowing costs for the government and weaken its external financial buffers.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.