Raghu,

You will get that resolution, it is just that depending on the mechanical device that the encoder is attached to, if there is any source of significant vibration, even when the system is at rest, you will sense that vibration in that the total encoder count will go up and down.

An example :Total Encoder Count 1000,1001,1000,1001,1000...

If you do not need this kind of resolution you could divide down the encoder counts using a binary counter.
Or you could decrease the resoultion in software.

Jacob