By Suvashree Choudhury and Rafael Nam
MUMBAI (Reuters) - The Reserve Bank of India held interest rates steady as widely expected at a policy review on Tuesday, and said it could ease monetary policy early next year provided inflationary pressures do not reappear and the government controls the fiscal deficit.
Uneasy over India's weak recovery from its slowest phase of growth since the 1980s, the six-month-old government of Prime Minister Narendra Modi had been seen as favouring an early reduction in rates.
The finance ministry said later in a statement it looked forward to the RBI's support in "the revival of growth and employment" while adding it would work with the RBI on reducing inflationary expectations and reviving investment and growth.
RBI Governor Raghuram Rajan has resisted calls for rate cuts and earlier reiterated his view that containing inflation was a prerequisite for the economy.
"What again and again we have seen in India, and outside India also, is that the way to sustainable growth is to have moderate inflation," Rajan told a news conference.
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Forty-one of 45 economists polled by Reuters had forecast that the RBI would keep the repo rate at 8.00 percent, while four had expected a reduction of 25 basis points.
The RBI's next policy review is in early February, and most analysts had expected the central bank would either cut interest rates then or wait until April.
"A change in the monetary policy stance at the current juncture is premature," the RBI said in its statement.
"However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle."
Rajan told a teleconference with analysts that the central bank wants to be confident that underlying trends for non-food inflation were moving in the right direction before reducing interest rates.
India's benchmark 10-year bond yield fell 5 basis points on the day to 8.01 percent as investors cheered the central bank's more dovish stance.
ECONOMY NEEDS MORE THAN RATE CUT
In its statement, the RBI spoke of the need to revive capital investment, and called on the government, which will announce its budget in February, to "stay on course" to meet fiscal deficit targets. Those targets have been jeopardised by weak tax revenue growth and the slow pace in selling off stakes in state-run companies to raise funds.
Data released on Friday showed economic growth slipped to 5.3 percent year-on-year in the July-September quarter, down from 5.7 percent in the previous quarter. India needs far faster growth to create jobs for all the young people joining its workforce in coming years.
"Things will not pick up just because of rate cuts," said J. Venkatesan, an equity fund manger for Sundaram Asset Management in Chennai. "A strong reforms push is needed to revive economic growth."
Helped by tumbling oil prices, India's annual consumer price inflation (CPI) slowed to 5.52 percent in October, sharply down from a peak of 11.16 percent struck in November last year, but the RBI warned that it expected inflation to rise in December as a favourable base effect wanes.
The RBI has targeted CPI at 6 percent for January 2016, and the central bank said risks to the target "appear evenly balanced under the current policy stance".
Rajan said if that target was achieved the RBI would then aim for a longer-term inflation target of 4 percent.
While there were few expectations that the RBI would cut interest rates this time, officials had told Reuters last week that Finance Minister Arun Jaitley would press Rajan for a reduction when they held a customary meeting before the policy review - though there was no confirmation that the meeting took place.
The central bank is not statutorily independent from the finance ministry, but it enjoys broad autonomy in setting monetary policy, though there are plans to amend the RBI Act and incorporate a monetary policy committee that gives voting rights to officials both within and outside the central bank.
"In the weeks ahead, the government and RBI will work towards a monetary policy framework that will help institutionalize the gains achieved on the inflation front, so as to reduce inflationary expectations and further support the revival of investment and growth," the ministry said.
(Editing by Simon Cameron-Moore)