Indonesia's central bank delivered an off-cycle rate cut of 25 basis points, bringing the benchmark BI-Rate to 5.5% as the country grapples with its worst financial crisis in years. According to CNBC TV18, this emergency action comes ahead of the scheduled June 17-18 policy review and follows a larger-than-expected 50 basis points increase in May. The central bank stated it 'sees the need to take further steps to strengthen the stabilisation of the rupiah exchange rate by raising yields and offering various incentives to encourage foreign inflows'. The move represents the second off-cycle rate increase under Warjiyo's leadership, with the last such action occurring in May 2018 during an emerging-market selloff triggered by rising US interest rates.
Indonesia's benchmark stock index has tumbled 36% since hitting a record high just five months ago, making it the worst performer globally among more than 90 tracked by Bloomberg. According to reports from CNBC TV18, the rupiah has weakened more than 8% this year while foreign investors have pulled more than $3.5 billion from Indonesian stocks. The selloff has extended to Thursday, with the benchmark index falling to its lowest since late 2020, extending this year's losses to more than 30%. However, recent emergency measures have shown some impact, with stocks rallying 4.8% before heading into the noon break following the rate cut announcement.
Since taking office in October 2024, President Prabowo has implemented a series of interventionist policies that have unsettled global investors. As reported by CNBC TV18, Prabowo has pledged to boost annual growth to 8%, rolled out a nationwide free school meals programme, expanded the state's role in the economy, and channelled billions of dollars into the sovereign wealth fund Danantara. More recently, his move to take direct control of key commodity exports to curb tax evasion triggered a selloff in exporter stocks. The departure of former Finance Minister Sri Mulyani Indrawati marked a turning point, as she was widely seen as a guarantor of fiscal discipline who reassured markets about conservative budget management that helped Indonesia earn investment-grade credit ratings.
The rupiah has become the clearest expression of market anxiety, falling about 8% this year and ranking as Asia's weakest currency amid the current crisis. According to CNBC TV18, the currency has extended gains to 0.2% following the central bank's rate cut announcement. The emergency action reflects escalating concerns after foreign exchange reserves fell for the fifth consecutive month in May, marking the longest losing streak since 2018. Traders had previously assigned around a 45% chance it falls to 19,000 by December and a 27% probability of a slide to 20,000 one year from now. The currency weakness has been driven by concerns about macro imbalances and policy credibility, particularly on the fiscal side.
Foreign investors have significantly reduced their exposure to Indonesian sovereign debt, cutting holdings by 86 trillion rupiah ($4.8 billion), or about 9%, since last August. As reported by CNBC TV18, Indonesian bonds have lost more than 8% for dollar-based investors this year, compared with a 1.6% gain for emerging-market debt overall. The move comes a day after Indonesia's 10-year government bond yield jumped to the highest in more than a year, underscoring pressure on local assets as investors reassess exposure to emerging markets. Another concern is Bank Indonesia's growing ownership of government debt, with the central bank now holding about 27% of sovereign bonds, an unusually high share for an emerging economy.
Investors faced another significant blow when MSCI Inc. warned that Indonesia could be downgraded from emerging market to frontier status, triggering one of the country's worst stock-market routs in decades. According to CNBC TV18, the warning carries weight because MSCI influences how billions of dollars are allocated globally. The issues MSCI flagged predate Prabowo and reflect structural problems including concentrated corporate ownership and lax regulatory oversight. Authorities have responded with tighter disclosure requirements and proposed changes to free-float rules, but these measures have done little to halt the selloff. The emergency rate cut and coordinated government-central bank efforts to boost asset appeal represent a significant escalation in policy response.
