Indonesian rupiah drops to record low on strong dollar, MSCI woes

The Indonesian rupiah plummeted to an unprecedented low following the strengthening of the U.S. dollar and concerns over MSCI Inc. potentially removing Indonesia from its emerging-market indexes. The rupiah weakened as much as 0.3% to 18,204 per dollar on Thursday, dipping below the earlier record low of 18,190 recorded in early June. The Jakarta Composite Index of shares edged up by 0.8%, while the 10-year bond yield remained stable at 7.62%.

Investor sentiment has been fragile as MSCI proposed reclassifying Indonesia as a standalone market in October, citing persistent investability concerns. Goldman Sachs estimated a potential outflow of US$5.6 billion if such a move took place, effectively excluding Indonesia's stocks from MSCI's indexes. Ten-year bond yields surged to a six-year high, and the benchmark equity index had its lowest level since 2020 earlier in the month.

MSCI's warning has added to the myriad of challenges already affecting Indonesia's assets, such as policy uncertainties, potential sovereign rating downgrades, and the impact of persistently high oil prices. These escalating costs are placing additional pressure on government subsidies and public finances. The rupiah has fallen over 8% this year, making it the worst-performing currency in Asia. Bank Indonesia remains vigilant about market developments and is monitoring capital outflows following the MSCI announcement.