RPT-Nursing rupee, India likely to keep rates unchanged

Mon Jul 29, 2013 10:43pm EDT

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    By Suvashree Dey Choudhury and Tony Munroe
    MUMBAI, July 30 (Reuters) - India's central bank is likely
to leave policy interest rates unchanged later on Tuesday as its
priority has switched from reviving an economy growing at its
slowest in a decade to supporting a currency that recently
plunged to a record low.
    The Reserve Bank of India took strong action to defend the
embattled rupee two weeks ago by tightening money market
liquidity and pushing up short-term interest rates to curb fund
flows out of India and make speculating against the currency
more costly. 
    But the strategy has prompted many economists to cut their
growth forecasts, despite the government's assurances that the
squeeze will be temporary.
    Investors will be looking for clues on Tuesday for how long
the RBI will maintain its tight grip on cash conditions.
    "The guidance is likely to be hawkish," said Gaurav Kapur,
senior economist at Royal Bank of Scotland in Mumbai.
    Outflows of funds from emerging markets on speculation that
the U.S. Federal Reserve will soon start winding down its easy
money policy and India's own record high current account deficit
at 4.8 percent of GDP have made the rupee vulnerable and
virtually scotched chances of lower interest rates for now. 
    Turkey, Brazil and Indonesia have all raised rates to
counter capital outflows driven by prospects for tighter
monetary policy in the United States. 
    
 
    The RBI last cut its policy repo rate by 25
basis points to 7.25 percent in May. It left the rate on hold at
its last review, in June, despite growth that slowed to just 5
percent in the last fiscal year.
    Before the rupee's sharp fall began in May, the RBI's next
move on rates was widely expected to be a cut. 
    "If the rupee's weakness persists, the probability of a
reversal in monetary policy stance will increase. But for now,
the recent measures have given some time for RBI to wait and
watch," said Kapur.
    The RBI is also expected to keep the cash reserve ratio
 for banks unchanged at a record-low 4 percent.
    Tuesday's monetary policy review will be the last for RBI
Governor Duvvuri Subbarao, whose term will end in early
September after five turbulent years, unless it is extended.
    The Indian currency fell to an all-time low 61.21 to the
dollar on July 8, when it was down about 10 percent since the
start of the year.
    While India has succeeded in stabilising the rupee, which
ended on Monday at 59.42, the central bank said in its quarterly
macroeconomic review on Monday that its recent measures only
provide breathing room and called for the government to put in
place reforms to attract longer-term capital flows. 
    However, New Delhi has struggled to implement steps to
attract foreign corporate investment, and with elections due by
May, Prime Minister Manmohan Singh's weak coalition government
has limited room for pushing through further reforms.
    Indian policymakers will be hoping the Fed doesn't spark a
fresh surge in flows away from emerging markets when it holds
its policy review later this week.
    The RBI released a report on the economy on Monday that said
its priority was currency stability, giving little comfort to
investors hoping for a return to rate cuts anytime soon.
    "The report suggests there is no hope of monetary easing for
a long time and that interest rates will have to remain high
until structural reforms are implemented," said A. Prasanna,
economist at ICICI Securities Primary Dealership. 

 (Additional reporting by Neha Dasgupta; Editing by Simon
Cameron-Moore)
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