The Institute of Economic Growth (IEG) has forecast a marginally lower inflation due to a fall in domestic fuel prices, in line with the international trend.
It, however, cautioned that any change in the general price level was dependent on the monsoon and industrial performance.
"Inflation, based on the wholesale price index, would fall below the 5 per cent mark in the next three months, while that based on the consumer price index was likely to be above the 5 per cent mark," IEG said in its latest report.
It also predicted a marginal dip in industrial production over the next three months mainly due to the continued appreciation of the rupee against the dollar. This would have an adverse effect on industrial exports and a decline in non-food credit, IEG said.
Terming the 4.9 per cent industrial growth achieved in April 2003 as "temporary", IEG said, "An increase in the trade deficit (due to exchange rate appreciation) and a fall in the non-food credit will lead to a marginal decline in industrial output from its current levels."
IEG also said the growth rate of the index of industrial production was likely to be 4.8 per cent, 4.6 per cent and 4.5 per cent in July, August and September, respectively.
It said strong dollar inflows from exporters and weakened dollar demand in the international markets, coupled with the effect of the Severe Acute Respiratory Syndrome (Sars) virus in the emerging Asian markets leading to a diversion of foreign institutional investments, had led to an appreciation of the rupee against the dollar.
On the country's forex reserves, which touched $81.33 billion by the end of May, IEG said, "Given the trade deficit in April, a decline in interest rate differentials and a payout of $4.23 billion plus the interest due in August for the Resurgent India Bonds may contain the rise in reserves."
Citing the payment outgo towards the Resurgent India Bonds by August, IEG said it might reduce the excess liquidity to some extent, which was also expected to put upward pressure on short-term interest rates.
IEG also said the appreciating rupee might bludgeon the export performance. "It appears that export growth this year will be less than the last year's growth," it said.
The country might see high growth in the coming months, but much would depend on the domestic industrial performance, it added.
IEG said the decline in interest rate differentials, sluggishness in the domestic market and the Iraq war had contributed to a decline in foreign institutional investments to $77 million in February 2003 from $269 million in January.
"The expected decline in the domestic interest rates, appreciation of rupee vis-a-vis dollar and poor corporate results will keep foreign institutional investments away from the domestic market for a while,
