(Repeats story from Friday ahead of cbank decision on Monday
around 0530 GMT)
* Indian rupee worst hit EM currency after rand since May
* Wholesale inflation eases for 4h straight month
* Retail inflation still high on elevated food prices
* RBI has cut repo rate at every review so far in 2013
By Suvashree Dey Choudhury
MUMBAI, June 14 (Reuters) - Softening headline inflation
alone will no longer be enough to spur the Reserve Bank of India
to cut interest rates at a time when it faces other pressing
challenges such as a record low rupee and the risk of
potentially destabilising capital outflows.
The central bank is due to review monetary policy on Monday,
facing the same strains erupting the rest of Asia as financial
markets are looking shaky even as policymakers continue to
struggle with cooling economic growth.
Yet India faces its own unique challenges, given consumer
inflation remains elevated while a current account deficit that
hit a record high of 6.7 percent in the October-December quarter
continues to weigh on the rupee.
That is bound to make traditionally cautious RBI even more
reluctant to cut the repo rate again after easing
in each of its three previous reviews.
"They (the RBI) have their eyes set on multiple goalposts,"
said Radhika Rao, economist with DBS Bank in Singapore, while
citing other factors such as the government's fiscal deficits.
"The combination of these factors lower the odds for a rate
cut on Monday."
India's wholesale price index rose by a slightly
less-than-expected 4.7 percent in May from a year earlier,
according to data on Friday, showing inflation has fallen within
the RBI's comfort zone of 5 percent for a second consecutive
Only two weeks ago, the data would likely have fueled hopes
the RBI would cut interest rates again.
A Reuters poll conducted on Thursday showed that 28 of 38
analysts expect the RBI to hold its rate steady at the June
That expected caution comes as fears of a tapering in U.S.
stimulus spending has exposed India's vulnerability to flows of
foreign money. It is one of the few Asian countries besides
Indonesia to run a current account deficit.
That has hit the rupee, which touched a record low
of 58.98 on Tuesday, and has shed more than 7 percent since May
to become the worst performer among emerging market currencies
after the South African rand.
The rupee falls have been exacerbated after foreign
investors sold a net $3.8 billion of Indian debt over the past
16 consecutive sessions. The weak currency and outflows could
further aggravate concerns about the current account deficit,
creating a potentially worrisome feedback loop.
"More than anything else, the rupee's sharp fall could be
the most important factor that could work in favour of no rate
cut," said Gaurav Kapur, senior economist at Royal Bank of
Indonesia responded to outflows and market volatility on
Thursday by unexpectedly raising interest rates - the first
Asian central bank to do so since 2011 - in a bid to support
its currency, but that is a virtually impossible measure for the
The RBI is instead likely to wait for its previous rate cuts
- totaling 75 basis points so far this year and 125 basis points
since April 2012 - to be passed down to consumers and boost an
economy growing at its slowest in a decade.
The RBI will also need to see some stabilisation in the
rupee, especially after Finance Minister Palaniappan Chidambaram
on Thursday pledged new reforms to help bolster foreign
confidence in the economy.
Recent central bank and government measures to curb the gold
imports, which along with oil constitutes India's two biggest
imports, are also beginning to filter through.
Meanwhile, the RBI would need signs of more moderation in
consumer inflation, which remains high at 9.31 percent, despite
easing for a third straight month in May.
"The inflation number is much better, but I think the other
factors like weakness in the external sector, and high consumer
inflation will probably make them (RBI) pause," said Saugata
Bhattacharya, chief economist at Axis Bank in Mumbai.
(Editing by Rafael Nam & Kim Coghill)