UPDATE 2-India leaves interest rates unchanged, cuts bank reserves

* RBI guidance indicates rate pause in Dec, cut in Jan-March

* Bond yields, swap rates up, stocks fall

* Finance Minister: ``We'll walk alone'' on growth, if necessary

(Adds details, comments, quotes, background)

MUMBAI, Oct 30 (Reuters) - India's central bank left interest rates on hold on Tuesday but cut the cash reserve ratio for banks, defying pressure from the government to lower rates for the first time since April but also indicating it may ease policy in early 2013.

Leaving the policy repo rate unchanged at 8.00 percent was in line with forecasts in a Reuters poll. But rate cut expectations had grown after India's finance minister on Monday outlined a plan to cut the country's hefty fiscal deficit, which is a concern of the central bank.

Finance Minister P. Chidambaram appeared disappointed with the outcome of the central bank meeting, as were investors, who pushed bond yields and swap rates higher and stocks lower.

Unusually, Reserve Bank of India Governor Duvvuri Subbarao gave fairly explicit policy guidance, saying the central bank might ease policy in January to March, the final quarter of the fiscal year, when it expects inflationary pressure to ease. That implied it will not cut rates at its next review on Dec. 18.

``There's a positive that RBI has said there's a likelihood of easing in the Jan-March quarter. Looks like the RBI wants inflation to peak out before cutting rates, so we shouldn't expect anything in December,'' said A. Prasanna, economist at ICICI Securities Primary Dealership in Mumbai.

The central bank said it expects inflation -- which hit a 10-month high of 7.8 percent in September -- to rise before easing in the final quarter of the fiscal year.

``While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13,'' Subbarao wrote.

Investors, companies and the government have been clamouring for a cut to interest rates to boost the economy's flagging growth. India's interest rates have been on hold since April even as many other central banks cut rates, and remain some of the highest among major economies.

``Growth is as much a challenge as inflation,'' Chidambaram said after the central bank announced its policy decision.

``If government has to walk alone to face the challenge of growth, well, we'll walk alone,'' he told reporters.

``Government is doing its best to send a clear message that we are on the path to fiscal consolidation. And it is my hope that everyone will read and understand government's commitment to fiscal consolidation,'' he said.


While Subbarao has put rates on hold, he has been cutting CRR in order to inject more liquidity into the banking system and pressure banks to pass along earlier rate cuts to borrowers.

``A rate cut in the face of the jump in September WPI, the sharp upward revision to the historical numbers and recent rebound in the proxy core inflation measure, might have put the bank's inflation-fighting credibility at risk,'' said Radhika Rao, an economist at Forecast Pte in Singapore.

The central bank has been calling on the government to follow through quickly on recent steps to cut its deficit and encourage investment with further measures.

Chidambaram's plan to nearly halve the fiscal deficit in just over four years gave few specifics, but his announcement at a hastily called news conference on Monday was seen by financial markets as adding pressure on the RBI to cut rates.

New Delhi has unveiled a spate of reforms to bolster investment and rein in its deficit, including raising the price of subsidised diesel and lifting caps on foreign investment in several industries.

``Recent policy announcements by the government, which have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions,'' Subbarao said in the policy review.

Economic Affairs Secretary Arvind Mayaram said the government and central bank need to work together.

``I hope they will consider next time ... before January, there is a need for rate cut,'' he said.

The RBI cut its GDP growth forecast for Asia's third-largest economy this fiscal year to 5.8 percent from 6.5 percent previously. It increased its projection for inflation in March to 7.5 percent from 7 percent earlier.

The central bank lowered the cash reserve ratio, the amount of deposits that banks must keep with the central bank, by 25 basis points to 4.25 percent.

It said the move would inject about 175 billion rupees ($3.24 billion) into the banking system in order to pre-empt a potential tightening of liquidity.

In the Reuters poll, economists had been divided on whether or not the RBI would cut CRR.

Bond market investors were disappointed that the cut in CRR suggested the central bank would delay expected bond purchases.

India's 10-year bond yield climbed 5 basis points to 8.18 percent from Monday's close and the one-year overnight indexed swap rate rose to 7.66 percent from 7.58 at end of previous session.

Stocks were down more than 1 percent, putting India on track to be the day's worst-performing market in Asia. ($1=53.995 rupees)

(Additional reporting by Neha Dasgupta and Swati Bhat in MUMBAI and Arup Roychoudhury in NEW DELHI; Editing by Neil Fullick)