Indonesian stocks sink to a six-year low as the MSCI selloff spreads into a second session

Indonesian stocks fell to their lowest level in six years on Monday, Oct. 19, extending a rout that began when MSCI proposed dropping the country from its emerging-market indexes. The exchange halved how far a stock may fall in a day, and officials lined up meetings with MSCI and among themselves to try to steady the market.

Two bad sessions in a row

Monday's slide came on top of the worst day for Jakarta since 1998. On Friday, the first session after MSCI's announcement, the Jakarta Composite Index, known locally as IHSG, closed down 11.57% at 5,185.11, and exchange data showed about $65 billion of market value was wiped out in that one day.

The selling resumed at Monday's open. The index started at 4,961.88 and hit its low of the day, 4,907.37, within minutes, a drop of about 5.4% from Friday's close. It ended the morning session at 4,923.26, down 5.05%, with 782 stocks lower and only 43 higher. It then recovered part of the ground in the afternoon and closed at 4,996.61, down 188.50 points, or 3.64%. Infrastructure, basic-materials and energy shares fell hardest in the morning, and the biggest drags on the index in that session included Bank Central Asia, Bank Rakyat Indonesia, Bayan Resources, Telkom Indonesia and Amman Mineral.

Taken together, Friday's and Monday's losses add up to a fall of about 14.8% in two trading days.

The exchange narrows the daily drop

Indonesia's authorities moved to slow the fall. After a weekend meeting between the Financial Services Authority, known as OJK, and market participants including analysts and economists, the Indonesia Stock Exchange cut the lower auto-rejection limit, the most a stock is allowed to fall in a day, to 7% from 15%. The exchange said the change gives investors "an opportunity to evaluate and digest available information." On Friday, OJK had announced fines totaling 2.1 trillion rupiah, about $116.4 million, against people linked to alleged manipulation of trading in the shares of three companies.

The exchange's leadership also scheduled an online meeting with MSCI for Monday to ask for the reasoning behind the proposal. "We, as well as the Financial Services Authority and most of the participants of MSCI, did not expect this," chief executive Jeffrey Hendrik told reporters, adding that market participants, including global investors, agreed Indonesia meets all the criteria to keep its status.

In Jakarta, Coordinating Economic Affairs Minister Airlangga Hartarto said the government would hold a special meeting of the Financial System Stability Committee, known as KSSK, this week. For now, he said, the government could only watch the market, and he argued that MSCI's assessment and Indonesia's economic fundamentals were, in his words, not connected.

Putting a price on an exit

Goldman Sachs tried to size the damage in a note on Sunday. Its strategists estimated that a full removal from MSCI's emerging-market indexes could trigger about $5.6 billion of passive fund outflows, equal to 18 days of average trading in the stocks of the MSCI Indonesia Investable Market Index. Another $2.7 billion could be at risk if FTSE Russell later took similar action, which Goldman treated as a separate scenario. Active funds benchmarked to the MSCI and FTSE indexes hold more than $8 billion of Indonesian shares, though any selling by them would be a choice rather than automatic.

"The burden of proof has shifted," the strategists wrote: avoiding reclassification will require clear evidence that announced reforms have been consistently put in place and have materially improved how the market works.

Much of the foreign money has already gone. The MSCI Indonesia Index had fallen 47% this year as of Friday, by Goldman's figures, and foreign ownership of Indonesian stocks has slipped to 25% from 27% in January, while the value of those holdings has nearly halved to about $130 billion. On Friday alone, foreign investors sold a net 3.34 trillion rupiah of shares on the exchange, bringing their net selling this year to 88.19 trillion rupiah. Goldman kept its underweight rating and said stocks may not have bottomed, even with the index valued at 7.3 times expected earnings, its lowest since the global financial crisis.

The rupiah and bonds feel it

The risk now is that the selloff spreads beyond stocks. The rupiah weakened to about 18,040 per dollar on Monday, not far from its record low of 18,190 set in June, after closing Friday at 18,025. The 10-year government bond yield stood at 7.25% at the end of last week after touching 7.34%, up from 7.19% at the start of the week, according to a weekly report from the Indonesia Capital Market Institute.

"Our bigger concern is not index-related selling itself," said Gary Tan, a portfolio manager at Allspring Global Investments in Singapore, "but the potential near-term spillover into the rupiah and domestic bond yields." Bank Indonesia announces an interest-rate decision this week, and Goldman expects the central bank to raise rates by a quarter point this quarter and again in the first quarter of 2027.

A long road to June

MSCI's proposal is not final. The index provider is taking feedback until April 30, 2027, and will announce a decision on or before June 30, 2027. It has said it expects to go ahead unless the consultation produces clear evidence of material improvements in how the market is governed and functions. Some investors think the worst of the index-driven selling is priced in. Aninda Mitra, head of Asia macro and investment strategy at BNY Investments, said foreign exposure to Indonesia has shrunk to the point where "there may not be much more downside from here," but added that attracting large amounts of capital will be tougher in this environment. The nearer tests come this week: what MSCI told the exchange, what the stability committee decides and how Bank Indonesia sets rates.