June retail inflation expected to remain high

NEW DELHI (Reuters) - India's headline inflation probably stayed near a two-year high in June even as industrial production in May likely contracted, increasing the odds that the central bank will keep interest rates on hold next month.

Consumer prices in June are estimated to have risen 5.73 percent on an annual basis, according to a Reuters poll, a tad lower than May's 5.76 percent - the fastest pace since August 2014.

That would be a worry for outgoing Reserve Bank of India (RBI) Governor Raghuram Rajan, who wants inflation kept below at 5 percent by March 2017.

The Aug. 9 policy meeting will be the last for Rajan, whose three-year term ends in early September. Between January 2015 and this April, he cut the repo rate by 150 basis points, to 6.50 percent.

After holding rates in June, the governor said the central bank was looking for room to reduce them further, but it remained concerned about pressure on food and commodity prices.

Demand-driven pressures are likely to be stoked by the hike of salaries and pensions for about 10 million government employees and pensioners. Vegetable prices, meanwhile, have surged due to seasonal supply disruptions.

While a pick-up in summer monsoon rains in recent weeks is expected to cool food inflation, most analysts don't expect another rate cut before a new governor is on the job. DBS in Singapore expects a rate cut in the October-December quarter.

NEW GOVERNOR, NEW MECHANISM

Prime Minister Narendra Modi is widely expected to name a new governor before July 18. Government sources say the race is mainly between former RBI deputy governors Rakesh Mohan and Subir Gokarn.

The government has to also constitute a Monetary Policy Committee (MPC) to set interest rates by a majority vote, a departure from the current regime where the decision effectively rests with the RBI chief.

It aims to name the six-member committee before the August policy review. Three members of the MPC would be RBI insiders, headed by the governor who would have the casting vote in the event of a 3-3 split.

Three external members would be chosen by a panel comprising Modi's cabinet secretary, the RBI governor, a top finance ministry bureaucrat and three outside experts named by the government.

India's statistics office will release retail inflation data and industrial production data at 1200 GMT on Tuesday.

Analysts surveyed by Reuters expect output at factories, mines and utilities to shrink 0.4 percent in May from a year earlier compared with a surprise 0.8 percent annual contraction a month ago.

(Reporting by Rajesh Kumar Singh; Additional reporting by Rupam Jain)