Economists see inflation dipping below the psychological 10 per cent barrier by end-December and falling further in Q4 FY 09 to hover around the 7-8 per cent mark by March.

However, notwithstanding the declining trend witnessed at present, they warn that inflationary pressures still exist in the economy and the Reserve Bank would continue targeting inflation in the medium-term.

"I see inflation at sub-10 per cent levels by end-December-January. Going by present trends, it should be in single digits in Q4 FY 09," said Bank of Baroda [Get Quote] Chief Economist Dr Rupa Rege Nitsure.

Inflation declined to 11.80 per cent for the week ended September 27 from 11.99 per cent in the previous week.

"It is a volatile period we are going through. Oil prices are declining but the rupee is (simultaneously) weakening. We will have to see what the net impact will be. Things are still uncertain but by the year-end, I think inflation will fall to the 10 per cent level," IDBI Gilts' economist Amol Agrawal said.

Though on a downward curve, economists warn of inflationary pressures still existing in the system which might prevent the Reserve Bank from going in for rate cuts over the next three months.

"The RBI is targeting an inflation level of 5-5.5 per cent. If, however, it continues to remain in double digits till January, then the tight monetary policy would continue," Crisil Director and Principal Economist D K Joshi said.

The economists said that a depreciating rupee could play spoil-sport by pushing up import costs.

"A depreciating rupee increases import costs. India's proportion of non-oil exports is still high at 65 per cent and so even if oil prices de-escalate, the overall effect will be nullified by the rupee weakening," Nitsure said.

Joshi agreed. "A depreciating rupee nullifies any softening of crude and commodity prices."

The rupee had fallen to the 49.02 level against the US dollar in early trade on October 10.

Another economist, Enam Securities' Sachichidanand Shukla, however, said that "though inflationary dangers exist, should crude prices fall by another $ 5, then under-recoveries of oil companies will disappear. The Government might then consider reducing oil prices. This will help push inflation down."

Nitsure pegged the yearly inflation average figure at around 9 per cent while Shukla and Agrawal put it at close to double digits. Joshi pegged it at a higher 11 per cent.