Expert view -- RBI holds rates, flags inflation risks

MUMBAI (Reuters) - The RBI kept interest rates unchanged as expected on Monday after cutting them in each of its previous three policy reviews, warning of upward risks to inflation posed by a falling rupee and increases in food prices.

The Reserve Bank of India also called for vigilance over global economic uncertainty, citing the risks of a reversal of capital flows from emerging markets. Such outflows would exacerbate the country's high current account deficit.

The repo rate remains at 7.25 percent and the cash reserve ratio (CRR), or the share of deposits banks must keep with the RBI, stays at 4.00 percent, despite falling inflation in recent months.

COMMENTARY

A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI

"I still think there is a possibility of a rate cut in July based on inflation views and on expectation that the currency markets will stabilise post the FOMC meeting this week. But if the volatility continues and the rupee continues to weaken, then we will review the call.

However, the risks of no action in July have increased going by the statement from the RBI.

But if the current trajectory of CPI continues, there could be one more rate cut going forward."

For full statement of RBI policy review, click http://link.reuters.com/cyq88t

BACKGROUND

- A slump in the rupee to record lows and the risk of potentially destabilising capital inflows have complicated the task for the RBI to loosen policy despite softening inflation and a decade-low economic growth.

- Finance Minister P. Chidambaram pledged last week new reform measures by the end of June including lifting caps on foreign direct investment and changes in locally-produced gas prices to win back investor confidence. The rupee slumped to a record low of 58.98 per dollar this week, adding to concerns about the prospects of a recovery in Asia's third largest economy.

- Industrial output in April grew 2.3 percent from an upwardly revised 3.4 percent in March, while the wholesale price index in May rose an annual 4.7 percent, the lowest in more than three years.

- Annual consumer price inflation slowed for the third straight month in May to 9.31 percent, but it was higher than market expectations and a weaker rupee could accelerate price pressures especially because India relies heavily on crude oil imports.

(Reporting by Treasury, Markets, Companies teams; Editing by Ranjit Gangadharan)