SINGAPORE, Jan 20 (Reuters) - Indonesia's rupiah hit a record low on Tuesday as concerns over central bank independence resurfaced amid lingering fiscal worries that have kept investors nervous about Southeast Asia's biggest economy.

The latest bout of weakness in the rupiah, which slid to 16,985 per U.S. dollar on Tuesday, came after President Prabowo Subianto nominated his nephew to join Bank Indonesia's Board of Governors.

The currency is down nearly 2% in January after dropping 3.5% in 2025 and was last at 16,965. The yield on 10-year Indonesia government bond was 3.3 basis points higher at 6.33%, an over-three-month high.

Prabowo's nephew, Thomas Djiwandono, currently a deputy finance minister, is one of three nominees whose names have been submitted to parliament, presidential spokesperson Prasetyo Hadi told reporters on Monday.

The focus will now switch to BI's policy meeting on Wednesday, where analysts expect BI to stand pat on rates.

Indonesia's widening budget deficit has worried investors.

Trinh Nguyen, senior economist for emerging Asia at Natixis Corporate & Investment Banking, expects the rupiah to underperform other Asian currencies in the short term due to investors demanding a higher risk premium for the economy.

"Concerns preceded the appointment as investors question the lunch program and the impact on Indonesia's bright spot - which is low fiscal debt and hard rule on 3% fiscal deficit on GDP."

"Now with the appointment of his nephew, Bank Indonesia will be under pressure to ease monetary conditions. But with the rupiah weak, we do not expect the central bank to cut," Nguyen said.

BUDGET DEFICIT WOES

Markets were stunned in September when Prabowo abruptly removed Indonesia's influential finance minister Sri Mulyani Indrawati, as investors feared that the hard-fought fiscal credibility could soon be eroded.

That also brought Bank Indonesia and its autonomy into the spotlight as investors fretted that independent monetary policymaking in Indonesia might be under pressure, with Prabowo targeting economic growth of 8% by 2029 from about 5% currently.

Foreign investors sold a net roughly $6.4 billion worth of Indonesian government bonds in 2025, adding to the pressure on the currency.

At 2.92% of GDP, the 2025 budget deficit was the widest in at least two decades outside the pandemic years and close to the statutory cap of 3% of GDP.

Daniel Tan, portfolio manager at Grasshopper Asset Management, said Prabowo's move to appoint his nephew has further sparked jitters among investors concerned about erosion of central bank independence.

"The nomination (of Prabowo's nephew) added to existing concerns that Indonesia's budget deficit cap could be raised," Tan said.

(Reporting by Ankur Banerjee in Singapore; Editing by Christian Schmollinger and Muralikumar Anantharaman)

By Ankur Banerjee