Jakarta – Bank Indonesia's plan to halt rupiah speculation in the banking sector should be helpful in curbing the depreciation of the embattled rupiah, analysts said, but only temporarily as the policy did not address the root of the problem – huge liquidity in the banking sector.

With no concrete efforts being made to force the banking sector to extend loans to the corporate sector (a move that would reduce excess liquidity in the banking sector), the new Bank Indonesia plan would not solve the real problems, which would therefore reoccur in the future, said Aviliani of the Institute for the Development of Economics and Finance (Indef).

"The move will definitely help, but for how long? This sort of situation (excess liquidity) will continue forever unless attempts are made to deal with the huge amount of excess funds in the banks, which is basically the root of the problem," she said.

"What we need is an integrated attempt to push the banks to lend more to the private sector. If this happens, we will no longer need to worry about excess liquidity being used for speculation against the rupiah." With the banking sector still reluctant to significantly increase its loan exposure to the private sector, Bank Indonesia says that the country's banks at the moment are awash in excess funds. While a significant part of these funds are invested in the central bank's promissory notes (SBI), some has reportedly been used for speculative dollar purchases.

To deal with this, Bank Indonesia announced plans to absorb funds from the market to help prevent the ailing rupiah from falling further. The national unit is currently hovering at more than a 2-year low.

New measures will be introduced in the next two weeks, including raising the minimum reserve requirements of banks and broadening investment alternatives by enlarging the range of financial instruments – including selling new bills.

Central bank governor Burhanuddin Abdullah expects that all these efforts will be capable of absorbing part of around Rp 40 trillion in excess liquidity.

It is hoped that the planned actions, coupled with other measures already in place including market intervention, will stabilize the battered local unit at around 9,000 per dollar.

The rupiah has so far lost about 11 percent since the start of the year, making it the region's worst performing currency.

However, Anton Gunawan, a Citigroup economist, doubted the moves would be effective in defending the rupiah, which he said would continue on a roller-coaster course for at least a month as sentiment would remain in favor of the dollar.

"In the next month, I think the rupiah will likely remain under pressure as negative sentiment is still prevailing here, mostly as a result of uncertainties regarding the US authorities' plans for an interest rate hike.

"There will also be domestic uncertainty, as well, at least until after the presidential election," Anton said, adding that the local unit would bounce back after that to around 9,000 toward the year-end.

Polling day for presidential election is July 5, with a possibly second round on September 20.