India's central bank held its key interest rates unchanged on Tuesday as it waits to see whether the recent easing in inflation will continue in the coming months, and signaled that a shift in policy stance is likely early next year.

The Reserve Bank of India left the repo rate unchanged at 8 percent and the reverse repo rate at 7 percent, in line with economists' expectations. The cash reserve ratio was also maintained at 4 percent as expected.

The central bank pointed out that there was still some uncertainty about the evolution of base effects in inflation, the strength of the ongoing dis-inflationary impulses and the pace of change of the public's inflationary expectations. Further, the bank also cited uncertainty in the success of the government's efforts to hit deficit targets.

"A change in the monetary policy stance at the current juncture is premature," RBI Governor Raghuram Rajan said in a 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."

The next policy review is scheduled for February 3 and Finance Minister Arun Jaitley is set to present the budget on the last working day of that month. Hence, economists expect any RBI move to come in March and beyond.

"We had thought that evidence of increasing slack in the economy, the sharp slowdown in inflation and lower current account vulnerabilities would prompt the RBI into making an early start to the easing cycle today," Capital Economics India economist Shilan Shah said.

"The upshot is that, despite the decision to keep rates on hold today, Governor Rajan has laid the foundations for future rate cuts."

Consumer price inflation eased for a third successive month to 5.52 percent in October, its lowest level since the government started releasing the data in January 2012. Food price inflation eased to 5.59 percent from 7.67 percent in the previous month.

The RBI's January 2015 inflation target is 8 percent. The bank expects November inflation, which is due to be released in the middle of this month, to reveal further easing.

However, the bank said the favorable base effect that is driving down inflation will likely to dissipate and the headline figure may rise in December.

"The key uncertainty is the durability of this upturn," Rajan said. "The full outcome of the north-east monsoon will determine the intensity of price pressures relating to cereals, oilseeds and pulses, but it is reasonable to expect some firming up of these prices in view of the monsoon's performance so far and the shortfall estimated for kharif production."

The central bank revised down the CPI inflation forecast for March 2015 to 6 percent and said the risks to the projection for January 2016 appear to be evenly balanced.

The bank retained the growth projection for 2014-15 at 5.5 percent. In the July to September quarter, the economy expanded a better-than-expected 5.3 percent annually after a 5.7 percent expansion in the previous three months.

The RBI expects domestic activity to remain muted in the third quarter and farm growth to be subdued in 2014-15 due to weak monsoon. Weak growth and slower rise in wages are likely to weigh on rural consumption spending, it added.

Industrial activity is likely improved, while the service sector is emitting mixed signals, the bank said. Investment growth remains critical for any sustained pick-up in overall economic activity, the bank stressed.

Expressing concern, the RBI said the still slow pace of reviving stalled projects, despite government efforts, warrants policy priority. The bank also noted that the ongoing efforts to ease stress in the financial system has released resources for financing the envisaged investment push.

RTTNews