The buoyancy in the economy is likely to continue with falling inflation and interest rates.

Industrial growth will pick up, exports will do better and the rupee will depreciate slightly in the coming months, says the Institute of Economic Growth's monthly report on the economy.

The wholesale price index-based inflation is expected to drop further as prices of primary articles will decline, following a normal monsoon.

However, the growth in money supply may prevent a sharp fall in inflation, the think tank says, projecting an inflation level of around 4.5 per cent between August and October 2003.

The recovery in industrial output, on account of the incentives announced in the Budget and external demand, will be further fuelled by the normal monsoon.

The only worrying factor for industrial growth is rising imports due to exchange rate appreciation, says the monthly monitor for July 2003.

Based on a first-quarter industrial growth of 5.3 per cent, the IEG has forecast a 5.9 per cent growth in industry in the second quarter of the current financial year.

The growth in exports is expected to remain in the double-digit range on account of recovery in global demand and declining domestic inflation.

Imports will also continue to be strong because of industrial recovery, rising world oil prices and appreciation of the rupee in nominal terms, says the report.

In the July-September period, export growth is forecast to be 18 per cent while imports will grow 20.2 per cent.

The rupee/dollar exchange rate is forecast to be around 46 from August to October 2003.

While rising exports will result in further appreciation of the rupee, the Reserve Bank of India's decision to cap rates on non-resident external deposits may purge the arbitrage opportunity for foreign funds.

The monthly monitor states that this will adversely affect the State Bank of India's plan to retain a portion of the Resurgent India bond deposits even after September 2003. This may lead to depreciation of the rupee, the study adds.

The money supply growth, which has risen marginally due to the increase in forex reserves and credit offtake, will rise further due to falling interest rates.

The expected resilience in both agriculture and industry will raise the demand for credit.