The much-desired stability in the currency rate would come about because of the sharp increase in imports, resulting in larger trade deficit, IEG said in its periodical - Monthly Monitor.
However, the policy direction of the US Federal Reserve would also have an impact on the domestic currency movement since it has become stronger partly due to arbitrage advantage in favour of the Rupee investment, it said.
"Due to expected widening of trade deficit, the Rupee would stabilise at around Rs 40 (a dollar) but this would also depend on the future US interest rate policy," IEG said. For April, the country's trade deficit was seven billion dollars. The economic think-tank also forecast a stable interest regime in the short term as the rates have peaked.
It expected RBI not to temper any further with interest rates. "The RBI decision to mop up short-term excess liquidity through open market operation is an indication that interest rates may not be temepered further... We forecast that the Prime Lending Rates would be stable for sometime," it said.
However, IEG's earlier prediction that Index for Industrial Production would slow down from April onward has proved wrong as the IIP for the first month of the current fiscal surged by 13.6 per cent on the back of 15.1 per cent growth in the manufacturing sector.
