The main stock index slipped more than 2 percent while the rupiah dropped as much as 0.33 percent to 16,880 a dollar, its lowest since Jan. 22.

Moody's said on Thursday it had cut Indonesia's credit rating outlook to negative from stable, citing reduced predictability in policymaking days after MSCI flagged transparency issues that triggered a market rout of more than US$80 billion.

The global ratings agency cited concerns about policy effectiveness and signs of weakening governance, trends that it said could erode Indonesia's long-established policy credibility if they persisted.

Indonesia's chief economic minister Airlangga Hartarto late Thursday downplayed the step, saying ratings agencies and global financial markets were "yet to understand" the country's new growth strategy.

On Friday, Indonesia's financial regulator said it believed Moody's affirmation of its Baa2 rating shows the country's economic fundamentals remain solid and supported by its financial sector resilience and strong economic growth.

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"The main potential impact on Indonesian markets is a higher risk premium across asset classes, with particular pressure on long-term government bonds, state-owned enterprises’ and major banks’ stocks, as well as sentiment toward the rupiah and capital flows," said Rully Arya Wisnubroto, a market analyst at Mirae Asset Sekuritas Indonesia.

The focus will be on the rupiah, which remains pinned near the record low of 16,985 per US dollar it touched late last month on worries about central bank independence. It is down nearly 1 percent for the year.

The benchmark Jakarta Composite Index, which closed 0.5 percent lower on Thursday, has fallen 2.7 percent for the week thus far and was on track to extend last week's 6.9 percent decline.

"The Moody's outlook downgrade is a warning shot, which could trigger other ratings agencies to follow suit, particularly if the nature of policymaking remains subject to a heightened degree of uncertainty," said economists at OCBC in a note.

"The responses of the authorities will be watched even more closely, as credible policy choices remain a necessity to avert a credit ratings downgrade over the course of the next twelve to eighteen months."

Indonesia's international bonds slipped on Thursday following the Moody's announcement. Longer dated dollar-denominated bonds eased between 0.3-0.5 cents, with many trading at their weakest level in five months, Tradeweb data showed.

The rout in Indonesia's stock market has thrust the $1.4 trillion economy back under the spotlight as investors grow increasingly concerned about policy uncertainty under President Prabowo Subianto, including a widening fiscal deficit and central bank independence.

Vows from officials to make changes and the resignations of five top officials from the financial regulator and stock exchange have failed to stabilize the market, which continues to see outflows.

Foreigners sold a net of around $860 million worth of shares since last Wednesday, exchange data showed. They sold $1 billion worth of shares in 2025.

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