Indonesia faces pressure to raise interest rates next week after MSCI Inc. warned it may reclassify the country’s stock market, according to analysts.

Fears that Indonesia’s emerging-market status is in jeopardy is spurring foreign capital outflows, weighing on the currency.

Citigroup Inc. expects the central bank to raise its benchmark interest rate by 50 basis points to 6.25% on Oct. 21, reversing its previous call for a hold. Such a move could prevent the equity foreign outflows from becoming a contagion spreading to bonds and domestic investors, economist Helmi Arman wrote in a note on Friday.

Oversea-Chinese Banking Corp.’s economists Lavanya Venkateswaran and Ahmad Enver see a possible 25-basis-point increase next week, which they previously expected in December. The central bank will be balancing the benefits of a hike with a hold as inflation approaches the upper end of BI’s target. Inflation reached three-month high at 3.28% in September.

“While inflation remains within target, the combination of heightened market uncertainty and rising price pressures could complicate BI’s efforts to balance currency stability, inflation and economic growth,” OCBC said in a note.

MSCI is considering a downgrade for Indonesian equities from emerging to standalone status because of the severity of its investability problems. Indonesian stocks plunged more than 11% on Friday, their steepest drop since January 1998, prompting a 30-minute trading halt. The selloff deepened the market’s losses this year, while the rupiah neared a record low and government bonds declined.

Foreign stock sales could reach $3 billion to $5 billion if the reclassification is implemented, according to Josua Pardede, chief economist at PT Bank Permata in Jakarta. The actual amount will depend on how much investors previously sold, he said.

Bank Indonesia needs to “maintain a cautious policy approach and prioritize rupiah stability, without immediately raising interest rates solely due to stock market pressures,” Pardede said. He still expects BI to hold its policy rate at 5.75% this month, relying on foreign-exchange intervention and other measures to stabilize the rupiah.

Bank Permata, however, said sustained outflows, further currency weakness and rising inflation tied to global events would increase the likelihood of a 25-basis-point hike this quarter. “Foreign-exchange reserves may not be used indefinitely to counter fundamental currency weakness,” Pardede said.

Indonesia faces a widening current-account deficit, a record high last quarter, increasing its reliance on foreign capital to finance external needs.

Concerns about market governance could prompt investors to demand higher risk premiums on Indonesian assets, including government bonds, according to PT Bank Danamon economist Irman Faiz.

“What concerns me is not only the potential outflow of existing foreign capital but also the structural loss of new foreign capital inflows,” Faiz said. Reduced access to global institutional investors could also raise companies’ financing costs and constrain investment, he said.

Restoring market credibility will require improvements in ownership transparency, free-float disclosures and regulatory enforcement before MSCI makes its final decision by June 2027, Faiz said.

“Ultimately, monetary policy can only mitigate the impact of market volatility,” Pardede said. “Restoring investor confidence requires tangible improvements in transparency, oversight, and enforcement of capital market regulations” by the Financial Services Authority and the Indonesia Stock Exchange, he said.