Institute of Economic Growth has warned that rising foreign exchange demand and global interest rates may weaken the rupee and slow down forex accumulation, which is expected to touch $106 billion by March.

"Expected rise in the demand for forex and increase in global interest rates would lead to marginal depreciation of the exchange rate," IEG said in its latest report.

IEG said it would also dampen the current pace of forex accumulation, which is now nearing $105 billion.

Observing that a large part of the recent accumulation was short-term capital by foreign institutional investments inflows into the domestic stock market, IEG said "declining interest rate differentials, increase in imports, and rise in the international oil prices would hamper the current pace of forex accumulation to some extent" even as it expected domestic interest rate to fall.

Though FII inflows continue to be positive and were likely to see further investments due to the upgrading of India's rating by leading (global) rating agencies, IEG said the recent hike in international interest rates might restrain FIIs from huge inflow.

Noting the recent cuts in import duty, IEG said it along with rising global interest rates might lead to depreciation in the exchange rate, which was expected to be Rs 45.53 for a dollar by March as compared to the present rate of Rs 45.27/28 per dollar.

On the domestic interest rates, abundant liquidity in the economy and expected decline in inflation were expected to push down short-term rates further and the prime lending rate to below 10.25 per cent.

However, IEG said the rates on home loans seem to have bottomed out as one of the banks had increased their interest rate.

During the last two-and-a-half years, deposit rate had fallen more rapidly than the lending rates, which might affect domestic long-term savings "adversely", it said.

IEG said the Wholesale Price Index inflation would come down to 5.0 per cent from the present over 6.0 per cent due to expected decline in the prices of primary articles and consumer durables.

It said the recent rise in inflation was prompted by rise in money supply growth and increase in the prices of domestic oil, fruits and vegetables, sugar, edible oil and iron and steel.