Industrial production is expected to dip marginally in the next three months mainly due to rupee gaining strength against the dollar and the declining non-food credit, even as petrol and diesel might become cheaper, the Institute of Economic Growth said on Friday.

Referring to the industrial growth, which ticked 4.9 per cent in April 2003, as 'temporary,' IEG said: "The increase in the trade deficit (due to exchange rate appreciation) and fall in non-food credit, will lead to a marginal decline in industrial output from its current levels."

Further, it was apparent from the current negative trend in the consumer durable goods that there existed strong demand constraints in the economy, it said.

The Delhi-based institution forecast that the growth rate of Index of Industrial Production was likely to be 4.8, 4.6 and 4.5 per cent for the next three months, respectively.

Justifying the strengthening of rupee against dollar, it said strong dollar inflows from exporters and weakened dollar in the international markets, coupled with SARS situation in the emerging Asian markets, which might have diverted the foreign institutional investments, had led to appreciation in the exchange rate.

On forex reserves, which touched $81.33 billion by the end of May, it, however, said: "Given the trade deficit in April, decline in interest rate differentials and payout of $4.23 billion plus the interest due in August for the Resurgent India Bonds may contain the rise in reserves."

On oil prices, it said in line with international prices, petrol and diesel prices in the country were expected to fall further.

Expecting fall in the prices of domestic fuels, IEG said it might pull down the inflation 'marginally,' but any change in the general price level was dependent on monsoon and the industrial performance.

The economic think-tank predicts that inflation, based on Wholesale Price Index, would fall below five per cent mark in the next three months, while that based on Consumer Price Index was likely to be above the 5 per cent mark.

Apprehending that appreciating rupee might bludgeon the export performance, IEG said: "It appears that export growth this year will be less than the last year's growth."

On imports, it said the country might see high growth in the coming months, but much would depend on the domestic industrial performance.

Citing the payment outgo towards Resurgent India Bonds by August, IEG feared it might reduce the excess liquidity to some extent, which was also expected to put upward pressure on the short-term interest rates.