Ahead of the Reserve Bank of India's Monetary Policy announcement, a leading economic thinktank said on Monday that lending rates might dip marginally in the coming months due to recent decline in inflation.

"The recent decline in inflation and the rise in money supply growth might result in marginal fall in the lending rates in the coming months," Institute of Economic Growth said in its latest economic review.

According the Delhi-based institution, the prime lending rate, which averages 10.5 per cent at present, is likely to decline to around 10.3 per cent in the next three months.

On the money supply growth, which stood at 15.8 per cent in March 2004, it said it was 'well above' the Reserve Bank of India's targeted growth of 14-14.5 per cent and it may lead to a 'slight' upsurge in inflation.

IEG said the current growth in money supply was mainly due to surge of about 37 per cent in net foreign exchange assets with the banking sector, which accounted for over 50 per cent of rise in the supply.

"Given the change in the RBI's foreign exchange policy, which might lead to decline in the pace of forex accumulation, we expect money supply growth to decline marginally. But it would be above the targeted growth," IEG reasoned.

While predicting a small rise in general price level, the economic thinktank said the existing high world oil prices might not have much pressure on the domestic inflation because of the appreciating exchange rate.

However, it said in the next three months t he rupee was likely to weaken due to increasing global crude oil prices and rising imports.

IEG expressed the apprehension that international oil prices might rise further due to recovery in world demand.

It said the recent appreciation of rupee against dollar was mainly on account of huge inflow of foreign institutional investments in the domestic stock market, particularly because of a spate of public sector IPOs and public offers and the weakening of dollar in the global markets.

Though the recent public offers and IPOs led to high forex accretion, it said, the foreign exchange accumulation might slow down due to declining interest rate differentials, rise in imports, exchange rate appreciation, and the surge in global oil prices.

However, forex reserves, which are now over $110 billion, are expected to reach $113 billion by June 2004, IEG said.

Citing the high money supply growth in comparison to the targeted level, IEG cautioned that there was 'not much scope' for sterilisation and that 'RBI or the public sector banks may not be able to absorb any further rise in dollar supplies.'

Observing that imports had grown by 26 per cent and the exports by about 15 per cent, IEG said the trade deficit had already risen to $15 billion, which was almost double the level for 2002-03, and was expected to worsen further.

About the stock markets, it said the global rating agency Standard and Poor's bullishness over India's overall economic growth prospects would strengthen the existing positive sentiments in the market.