But at the same time I-Sec warned that sharp fall in inflation rate could put commercial banks in difficulty in reducing their prime lending rates (PLR). "If the trend in primary articles and manufactured products continue over the next few months, WPI-based inflation could drop to near one per cent," I-Sec said in its latest debt market update. It also said that inflation is likely to fall over the next few months as prices of fuel group items (still largely administered) are unlikely to be hiked ahead of the general elections.

On interest rates, it said many banks have cut their PLR by one per cent in March this year, but average deposit rates have not reduced at corresponding level resulting in a squeeze in spreads. Under these circumstances, banks would find it difficult to reduce theirPLR further.

It further said that higher inflation expectations would place real interest rates around six per cent. This was the reason the real interest rates have not increased as dramatically as the decline in reported inflation.

According to I-Sec, the wholesale price index (WPI) of all commodities would increase from 356.8 on June 12 to 363.1 by November 6 this year, ie, one per cent growth on year to year (YOY) basis.

While for primary articles, YOY inflation in November is expected to be (minus) 1.6 per cent, for fuel group it would be 3.5 per cent and 2.3 per cent for manufactured goods.

I-Sec said that low inflation was due to high base especially of primary articles. Further more, despite increase in international oil prices, a large portion of the increase has not been passed on. It said after the elections, administered prices could increase again and an economic recovery would also put an upward pressure on inflation.

On the Indian currency, I-Sec said that the rupee had stabilised butcould come under further pressure in case of escalation of tension at the Kashmir front. The rupee had come under pressure after the tension in Kargil but the pressure was relieved after the statement by RBI governor that the central bank was closely monitoring the market and would take appropriate steps to smoothen the demand-supply mismatches.