The appreciation in rupee will continue to put a downward pressure on inflation, which is forecast to stay around 4.4 per cent in the new year, global financial services major Goldman Sachs says.

"Our base case forecast for Wholesale Price Index based inflation for 2008 is 4.4 per cent, allowing the RBI to ease monetary policy in FY09," the Goldman Sachs report said.

The upward pressures on inflation are manageable, as long as aggregate demand continues to slow down, the rupee appreciates as per forecasts and authorities continue to resist a full pass-through of international oil prices, it added.

"We believe loose liquidity will increasingly feed into higher inflation from current levels. However, we expect a falling output gap, the primary determinant of inflation, and currency appreciation will keep inflation within the RBI's target range of below 5 per cent," Goldman Sachs analyst Tushar Poddar said in the report.

The growth in the broad money, which comprises of the currency, savings and small time deposits, has been growing at a multi-year high due to copious inflows, elevated oil prices and spending pressures on the fiscal and there is a risk that inflation may accelerate in 2008, the report said.

However, Goldman Sachs believes that a falling output gap and further currency appreciation would keep a lid on inflation and allow the central bank to start lowering rates in FY09.

"We assume that the 12 per cent appreciation in the rupee this year will impact inflation next year," Poddar said.

According to Goldman Sachs analysis, inflation would go from the current level of 3.75 per cent and an estimated 4.5 per cent in FY08 to 4.4 per cent in fiscal 2009, as loose liquidity passes though into inflation.

Meanwhile, there are some risks to the Goldman Sachs' outlook, which include liquidity becoming loose due to continued inflows, a food price shock, fuel charges being fully passed through and a much higher fiscal deficit.

In India, fuel prices are administered and not fully passed through and the timing of the pass-through matters significantly for inflation.

"We estimate that currently, India's' domestic fuel prices need to be increased by about 20 per cent to reflect global oil price movements and also allow oil companies to wipe out under-recoveries," Goldman Sachs said.

But with oil subsidies increasing in magnitude, it is becoming increasingly difficult for the government to not increase domestic fuel prices.

However, with elections around the corner, Goldman Sachs expect the government would raise domestic prices by less than 10 per cent.

Besides, the report said the inflationary expectations remain well-anchored in India due to the credibility of the central bank.

However, the inflation could go up to as much as six per cent, if fuel prices are hiked by about 20 per cent to fully reflect international prices, the increase in fiscal deficit to one per cent of GDP and money supply growth in excess of 20 per cent.