While the immediate impact on interest rates will be positive, the poltical indecision would keep the rupee under pressure, said the report.

The report further said that slowdown of foreign direct investment inflows under political uncertainty, diminishing foreign institutional investors' (FII) interest and the lack of political compulsions to keep the rupee under check would probably see volatility returning back to currency.

Eventhough the RBI looks well in control on the exchange front, the bias going forward would be on weakening of rupee, the report said. "The RBI is likely to push for status quo,'' it added.

While the demand for credit is unlikely to pick up, easy liquidity is likely to find its way in government bonds on lack of other investment altenatives, noted thereport. Over the next few weeks, the government bonds are likely to be well bid keeping a downward pressure on yields. Even concerns of higher fiscal deficit are likely to affect markets only in the latter half of the year.

``Not only would the present `caretaker' government find it difficult to take any significant policy decisions, it might even resort to some populist measures with a eye on the elections,'' said the report.

This might not bode too well for the confidence in an economy. Though the foreign direct investment inflows in the last few months have been quite encouraging, it remains to be seen whether the recent surge is a temporary phenomenon or a sustainable trend.

Further, the political scenario also raises a question mark on fresh FII investments and any improvement in export performance. The rupee breached the 43 level on April 26, 1999 when the president dissolved the lower house and declared fresh elections. Though the rupee weakness was temporary and the rebound was as fast as thedrop, political issues over the next fortnight are likely to keep the rupee under pressure.

Last fortnight saw stability returning to the spot rupee after the volatility in the first fortnight of the month. The forward yields also dropped significantly with six months premia coming down from a high of 7.25 per cent to around six per cent levels, it said.

The present yields offer attractive levels to build long dollar position (up to six months) as any further softening look unlikely. Also, the negative carry on of long dollar position is probably of good insurance value in the backdrop of a political vacuum, suggested the report.