"Point to point inflation is expected to start rising from November as the sharp spike in the base level starts to taper off," the report--released on Wednesday--said. The investment arm of term-lending institution ICICI Ltd said that an expected hike in oil proces as well as improved demand for manufactured goods would add to inflationary pressures. "However, we do not see inflation rising beyond five per cent by the end of the fiscal," the I-Sec report said.

The wholesale price index (WPI) based inflation is currently ruling at sub-two per cent levels which is due to the low year-on-year inflation since the base was high last year. I-Sec has outlined three reasons behind the likely rise in inflation rate.

First, the sharp increase in the base tapers off after November. Second,prices of petroleum products have not been revised upwards despite the increase in international oil prices. The diesel pricing mechanism is supposed to fix domestic prices to reflect landed cost and an upward movement in the price may be effected after the new government takes charge, it said.

Lastly, I-Sec said that there are signs of economic recovery and if the recovery materialises, producers of manufactured goods would be able to hike prices.

However, WPI inflation is likely to stay below 5 per cent till the end of the fiscal. "We project the inflation rate under a few assumptions. First, we assume that fuel prices would be revised upwards 6-8 per cent. Agricultural output is expected to be good this year and inflation of primary articles are likely to be between 4 to 5 per cent per annum between November and March. Inflation of manufactured goods group has stayed below 6 per cent since April 1996 and we expect this to be in 4 to 6 per cent band till March. We note that the point-to-point headlineinflation is likely to be near five per cent by March 2000," the commentary added.

According to the debt market update, with liquidity appearing to be comfortable till the end of the fiscal and inflation likely to stay around 5.5 per cent interest rates are unlikely to go up. "If there are no shocks on the extenal front, we are likely to see a further decline in yields by the end of the current fiscal," the commentary said.

The report added that although gross inflows are expected to be over Rs 4,000 crore this fortnight, the state loan issue will mop up the liquidity. "We expect call money rates to stay near 10 per cent during the current reporting fortnight. Overnight markets are expected to remain tight during the next reporting fortnight on advance tax outflows," the update said.