* Industrial output shrinks 1.6 pct year/year in May
* CPI inflation accelerates to 9.87 percent in June
* Exports fall for a second straight month in June
* Clampdown on gold imports narrows trade deficit
(Recast, adds output and CPI data, analyst comments)
By Manoj Kumar and Rajesh Kumar Singh
NEW DELHI, July 12 India's economic gloom
deepened on Friday with a surprise drop in industrial output, a
fall in exports and higher retail inflation, adding to the
central bank's challenge of reviving the economy and supporting
A global sell-off has made the rupee the worst-performing
emerging Asian currency so far this year. It hit an all-time low
of 61.21 per dollar this week and is down more than 8 percent
against the dollar so far this year.
The currency's relentless fall since mid-May has revived
inflationary pressures and has all but dashed hopes for an
interest rate cut at the Reserve Bank of India's (RBI) policy
review on July 30.
"The RBI is unlikely to be in a position to cut interest
rates at this juncture when the inflation is inching up and the
rupee remains substantially weaker against the US dollar," said
Aditi Nayar, a senior economist at the rating agency ICRA.
The central bank left interest rates unchanged last month,
after cutting them at each of its previous three policy reviews,
citing upside inflationary risks from the rupee's slide.
Industrial production unexpectedly shrank an
annual 1.6 percent in May, the first fall in five months,
according to the Central Statistics Office (CSO). That
confounded economists' average forecast for growth of 1.6
percent in a Reuters poll.
The output data suggested there was little sign of a
recovery in consumer demand and capital investment. Consumer
goods production fell an annual 4 percent in May. Capital goods
production, a barometer of investment in the economy, shrank 2.7
percent in May from a year earlier.
Retail inflation, meanwhile, quickened to 9.87
percent in June, snapping a three-month easing trend, on higher
"Both the data points (industrial production and retail
inflation) are disastrous since these are pointing in two
opposite directions which deepens the dilemma for policymakers,"
said A. Prasanna, an economist at ICICI Securities Primary
"Structurally inflation is still high and so there will be a
limit to how much (interest)rates can come down."
A weaker rupee probably pushed up headline inflation,
measured by the wholesale price index, to 4.90 percent in June,
after four straight months of easing, according to a Reuters
poll. That data is due out on Monday.
The currency's weakness, however, did not benefit Indian
merchandise exports, which fell 4.57 percent from a year earlier
to $23.79 billion, their second straight monthly fall.
TRADE DEFICIT NARROWS, GOLD IMPORTS MODERATE
An easing in the trade deficit, which narrowed in June from
a seven-month high the previous month, was the only bright spot.
The deficit narrowed to $12.24 billion from
$20.14 billion in May as the growth in gold and silver imports
slowed to 22.8 percent year-on-year at $2.45 billion in June.
The slowdown was largely on account of the curbs imposed by
Indian authorities including a 2 percentage point hike in import
duty last month to tamp down gold demand.
A lower trade deficit should ease pressure on India's
bloated current account gap, the broadest measure of
international trade, and the beleaguered rupee.
But the relief may not last long as low prices and the
approach of the wedding and festival season are expected to help
a steady rise in gold imports in coming months.
Gold prices in India are down 14 percent from the high seen
in late November 2011.
"Sustainability is still the pertinent question," said
Radhika Rao, an economist at DBS in Singapore, referring to the
moderation in gold imports.
A persistent shortfall in the trade account has pushed up
India's current account deficit to 4.8 percent of GDP, almost
twice the perceived comfort level.
The gap has not only increased India's reliance on overseas
funding, but has also hit the rupee the hardest in the ongoing
global sell-off in emerging currencies.
Gold forms an essential part of a bride's dowry in India and
is also considered auspicious as a gift or offering at religious
(Writing by Rajesh Kumar Singh, additional reporting by Anurag
Kotoky in New Delhi; Swati Bhat and Suvashree Dey Choudhury in
Mumbai; Editing by Hugh Lawson)