After a series of weak coalitions in the late 1990s, Indian elections this month are expected to return a stable government, which, whatever its make-up, will also be reformist.

"Past experience shows maximum foreign inflows have happened during periods of stability," Ravi Pai, Vice-President, Treasury at HDFC Bank said

The Indian economy has suffered an economic slowdown in the last three years, and foreign capital inflows slid from over $12 billion in 1996/97 (April-March) to $8.5 billion last year.

And the rupee, which is only convertible on the current account, has depreciated by almost 18 percent against the dollar in the last two years.

The rupee closed 43.4725/4775 per dollar on Monday, compared with a rate around 35.70 in early August 1997, when it began to decline aftera protracted period of stability.

But dealers see the trend reversing as India's economy gathers momentum and investors increase stakes in the country.

India's current account deficit is only around two percent of GDP, and while higher imports are a necessary consequence of faster economic growth, the dollar inflows from investors are expected to more than meet the bill.

"After a couple of years, the Reserve Bank of India will be struggling to cap the rupee's rise," Munish Saigal, controller of foreign exchange operations at Ranbaxy Laboratories, said.

In the year before August 1997, only dollar buying by the RBI stopped the rupee from appreciating more.

There had also been some conjecture that if India pursued capital account convertibility the central bank would have a battle on its hands trying to neutralise the monetary expansion caused by early waves of inflows.

The Asian currency crisis put the goal of capital convertibility on the backburner, but the RBI is still expected to meet theconditions required for eventual full convertibility.

RBI Deputy Governor Y.V. Reddy last week told a currency dealers' conference in Kathmandu the central bank's medium term objectives were reducing banks' cash reserve ratio (CRR), currently 10.0 percent, to the statutory minimum of three percent and developing a "more vibrant" currency market.

Reddy disappointed corporates when he told the conference the central bank was reviewing its ban on importers rebooking forward contracts, but with caution.

"In terms of priorities, free markets and speculation do not figure on the RBI's list. They do not have the remotest thought of dismantling those restrictions," Pai said.

Bankers believe the next government, as both of India's major parties introduced a proposal to cap spending in their election manifestos, will tackle a stubbornly high fiscal deficit and the central bank will soon act to lower interest rates.

India's combined central government, state governments and loss making public sector unitscurrently account for around eight percent of GDP, and nearly half the govenment's revenues are spent on meeting debt payments.

The deficit, in a freer market, would pull the rupee lower faster. "Primarily the fiscal deficit has to be tackled. That is the only negative factor. Otherwise, we have good reserves and low inflation," Saigal said.

Bankers said lower interest rates would fuel the currently slow upturn in India's growth rates and buoy Financial markets.

Wholesale price inflation is below two percent compared with year ago price levels, but Indian banks have lending rates ranging from 12 to over 16 percent for Prime customers.