RBI warns on prices, CAD; rattles market

By Neha Dasgupta

AHMEDABAD, India (Reuters) - The Reserve Bank of India (RBI) chief warned of upside risks to inflation and expressed worry over the country's high current account deficit on Thursday, denting hopes for rate cuts and sending bond yields to a two-week high and the rupee to a 10-month low.

RBI Governor Duvvuri Subbarao said the current account deficit, which hit a record high 6.7 percent of GDP in the December quarter on heavy oil and gold imports, would be a key factor in monetary policy decisions.

The RBI has cut policy interest rates by 25 basis points at each of its three reviews in 2013. Investors and analysts had generally expected another cut at its next review, on June 17.

"Growth is significantly moderated, inflation is somewhat off its peak but there are several upside risk factors, the balance of payments is under stress and investments have to pick up," Subbarao said during a speech in the western city of Ahmedabad.

Annual consumer price inflation slowed to 9.39 percent in April, but was still significantly higher than the wholesale price index inflation at 4.89 percent.

On Friday, India is expected to report that its economy grew at 4.8 percent in the quarter that ended in March, bringing full fiscal year growth to about 5 percent, the worst in a decade.

India's benchmark 10-year bond yield closed 5 basis points higher at 7.44 percent after rising to 7.45 percent, its highest since May 16, following Subbarao's comments late in the session. The rupee closed at 56.38/39 per dollar after hitting 56.39, its weakest since July 25, 2012, and 0.4 percent lower compared to 56.17/18 on Wednesday.

"The bond market gave up gains as now it feels that the pace of rate cuts will not be as much as it had anticipated earlier," said N.S. Venkatesh, treasurer at IDBI Bank in Mumbai.

Weakening commodity prices had bolstered hopes of easing pressure both on the current account deficit and inflation, although Subbarao warned against complacency.

"Global prices, especially commodity prices, certainly softened in the last few months. But we cannot take the soft prices for granted," Subbarao said.

(Additional reporting by Suvashree Dey Choudhury; Writing by Shamik Paul; Editing by Tony Munroe and Ron Popeski)