But improved credit demand and higher inflation with the economic upturn will lead to upward pressures on rates in the fourth quarter of 1999, it said in a market commentary.

The Reserve Bank of India's (RBI) bank rate -- the rate at which it offers refinancing to commercial banks -- is currently 8.0 per cent and is one of the key rates on which banks base their lending rates.

Its repo rate is at 6.0 per cent.

ANZIB said it did not expect an immediate cut in banks' cash reserve ratio (CRR) from the current 10 per cent, but said it would depend on demand for bank credit.

"If the credit offtake looks convincing, the RBI may not delay a CRR cut and infuse the needed liquidity in the system. While we may not see an immediate cut in CRR in the immediate term, a reduction in bank rate looksinevitable," it said."

The dip in inflation in June was partly a base effect, it said.

"Sharp decline year-on-year in the prices of vegetables and fruits have led to the decline in inflation. Last year, shortages in primary articles had led to a sharp rise in prices, this year prices reflect the easy supply conditions."

ANZIB said it expected this base effect to continue till December 1999.

"The current level of inflation also reflects the improved supply expectations with strong growth in agriculture."

The year-on-year inflation rate, measured by wholesale prices, fell to 1.83 per cent in the week ended July 3, the lowest since the early 1980s.

"Thus the dip in inflation is bound to impact nominal interest rates and the RBI may direct the move with a 50 basis point cut in the bank rate," ANZIB said.

The current rally in bond prices is being fuelled by expectations of a rate cut and this was not expected to fizzle out immediately once one happens, it said.

"Interest rates will remain stablefor some time after the rate cut and liquidity adequate. The RBI can cut CRR repeatedly to keep liquidity adequate," it said.

"However, improved credit demand and higher inflation with the economic upturn will lead to upward pressure on rates in Q4 1999."