The main reson behind the low inflation rate, according to the I-Sec report, is the high base of inflation triggered by a spiralling cost of primary articles last year. "Furthermore, despite increase in international oil prices, a large part of the increase has not been passed on. Prices of manufactured products have also remained stagnant as absence of strong demand growth has prevented the producers from hiking prices in many items," it said.

The WPI index continued to rise sharply last year till November. "Since theinflation is computed on a year-on-year basis, we expect the WPI inflation to continue to fall over the next few months," the report said.

Incidentally, an I-Sec report in the first week of April raised an interesting poser: Will we witness deflation in 1999? "Many growth figures, including inflation, are measured on year-on-year basis. The weakness of this methodology is that any abnormality in a year affects the growth for the following year. Owing to this, we may witness very low levels (and possibly negative) inflation towards the end of the calendar year (1999)," the report said. The I-Sec projection in April expected net year-on-year inflation (as measured by the WPI) to be just 1.1 per cent by November 1999, with the Index rising from 359.4 in November 1998 to 362.6 this year.

The projection would, of course, depend on whether the assumptions made by I-Sec hold true. Among the assumptions made are: a normal monsoon this year with no shortages in food articles; second, fuel prices are unlikely torise sharply; third, a broad economic recovery is still sometime away and demand growth for manufactured articles is likely to be sluggish.

On the forex front, the I-Sec report said "the rupee has stabilised but could come under further pressure in case of escalation at the Kashmir front." With no signs of abatement in the Kargil conflict, rupee came under renewed pressure during the fortnight touching a low of 43.42. Reserve Bank of India governor Bimal Jalan's statement that the bank would ensure "orderly markets" helped stabilising the rupee.

Most of the dollar purchases were on corporate demand and not on inter-bank speculation, the report noted. The forward curves also inverted for a brief period in the one month to six-month segment with one month rates touching 5.8 per cent but the premiums softened later.