UPDATE 1-Bank Indonesia defends rupiah as doubts rise over independence

* Rupiah falls on worry over BI independence, debt monetisation

* Parliament considers proposal giving govt more authority over BI (Adds comments, market movement)

JAKARTA, Sept 2 (Reuters) - Bank Indonesia intervened to smooth volatility in the rupiah on Wednesday, as the currency came under pressure on worries about central bank independence following a proposal to give the government more authority in monetary policy decisions.

The rupiah fell 1.6% by 0350 GMT on Wednesday to trade at 14,800 a dollar, the weakest since Aug. 18.

Nanang Hendarsah, Bank Indonesia’s (BI) head of monetary management, told Reuters it has intervened in the spot interbank market to smooth volatility, but declined to comment on other topics.

President Joko Widodo pledged on Tuesday that the central bank would remain independent after a panel of experts advising parliament recommended ministers be given voting rights at policy meetings and for BI’s mandate to be widened to include economic growth and employment.

The proposals are for a bill for the second revision of the 1999 central bank act.

The recommendations also included allowing BI to buy government bonds in the primary market and purchase zero-interest bonds under certain economic conditions, operations the central bank is currently doing only in response to the pandemic.

BI has pledged to buy $28 billion of government bonds while relinquishing interest payments, as part of a $40 billion fiscal financing deal with the government to fight the health crisis in 2020.

Widodo told foreign correspondents the so-called “burden-sharing” scheme would continue to 2021, but it was unlikely to be extended beyond that timeframe if economic growth recovers to 4.5%-5.5% by next year. The government expects a small contraction or flat growth this year due to the pandemic.

“Investors are worried about the news on the extension of burden sharing with BI to 2022 and concerned about BI’s independence,” a Jakarta-based foreign exchange trader told Reuters.

Citibank wrote in a research note the bill and concerns over unconventional monetary policy “adds to medium term weakening expectations for IDR”.

Analysts at ING said the bill “would undermine BI’s independence and could open the door to successive rounds of debt monetisation, something that would rattle investor confidence and exert additional depreciation pressure on the IDR.”

However, speaking at a seminar hosted by Fitch Ratings on Wednesday, BI Deputy Governor Dody Budi Waluyo assured investors the burden-sharing scheme was still a “one-off” policy that only applies in 2020. (Additional reporting by Tabita Diela, Maikel Jefriando in Jakarta and Shashwat Awasthi in Bengaluru; Editing by Tom Hogue and Jacqueline Wong)