ANTIQUES SHOPS

The Reserve Bank of India kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent, putting the onus on the government to take measures to revive flagging economic growth.

"Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," the RBI wrote in its mid-quarter policy review.

India's benchmark 10-year bond yield rose 9 basis points to 8.43 percent from levels before the announcement, while the new 10-year bond yield rose about 5 basis points.

The main BSE index erased gains before the decision to fall 1.1 percent, while the rupee weakened against the dollar to 55.60/62 from around 55.35-55.40 before the decision.

"The Reserve Bank of India's action is clearly disappointing," said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai.

"Inflation remains a concern, but the slowing growth needed at least a 50-basis-point rate cut. The RBI will have to ease sooner or later, otherwise there will be further challenges to growth," he said.

After cutting its policy rate by 50 basis points in April, the RBI had been widely expected to leave rates unchanged in June.

But global and domestic economic conditions have deteriorated sharply since then, driving expectations that India would cut both interest rates and the cash reserve ratio.

India's March quarter economic growth of 5.3 percent was far worse than expected and the weakest annual pace in nine years. The data sparked calls from industry for immediate action to lift an economy that Standard & Poor's says could be the first BRIC nation to lose its investment-level credit rating.

Meanwhile, April industrial output figures last week suggested little pickup in economic growth heading into the current quarter.

The government is politically hamstrung, so is unable to drive reform and its deep fiscal deficit leaves it no room to provide stimulus spending at a time when the euro area debt crisis is weighing on the global economy, a factor set to dominate a G20 meeting in Mexico on Monday and Tuesday.

LITTLE HEADROOM

However, RBI Governor Duvvuri Subbarao had little room to maneuver after May benchmark inflation rose to 7.55 percent, below double-digits from last year but still highest among industrialized countries and the BRIC group of Brazil, Russia, India and China.

"While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth," the RBI said.

Both China and Brazil have cut rates this year in order to support growth.

"Unless the government takes steps on fiscal adjustment, the RBI is not prepared to cut rates. Based on this document, there's unlikely to be a rate cut in July," said A. Prasanna, economist at ICICI Securities Primary Dealership in Mumbai.

Investors and companies have long called for India to implement pro-growth policies that would spur investment and help remove bottlenecks in the economy blamed both for restricting growth and keeping inflation high.

HSBC economist Leif Eskesen said the RBI's decision to hold fast was the right one.

"A significant portion of the slowdown in growth is because of supply constraints, and a cut in monetary policy rates or even the cash reserve ratio is not going to make much impact on growth," he said.

On Friday, India's ruling Congress party named Finance Minister Pranab Mukherjee as its nominee for the largely ceremonial post of president, ending a protracted political drama that had exposed the weakness of the coalition government.

With no obvious successor, Prime Minister Manmohan Singh, 78, could take charge of finance for now, a source close to the finance minister told Reuters. As finance minister during India's balance of payments crisis in 1991, Singh was the architect of reforms that spurred accelerated growth.

"There's hope that once the presidential election is over, and there is reshuffle at the finance ministry, the government may take some action on reforms, and on subsidies. But, the July policy of the RBI may come a little early before the government can take steps," Prasanna said.

(Editing by Neil Fullick)

Group of 20 leaders from major industrialized and developing economies, representing more than 80 percent of world output, start a two-day meeting in this Pacific resort to prioritize growth and job creation as the path to bolstering a world economy that is running out of steam.

Escalating violence in Syria and the near-collapse of a United Nations-brokered peace plan also will be in focus when U.S. President Barack Obama meets with Russian President Vladimir Putin on the sidelines of the summit on Monday. The two super powers are clashing over arming Syria and U.N. sanctions.

But Europe's progress toward lasting solutions for its debt crisis will be the focal point when G20 leaders hold their opening session on the global economy. While the Greek vote has eased immediate uncertainty over a possible euro zone breakup, the relief in financial markets could quickly evaporate.

G20 countries want to hear whether Europe is moving toward adopting a firm roadmap with a timetable for achieving the huge leap of financial, fiscal and political union in order to strengthen the resiliency of monetary union -- a path that EU leaders as yet have been unready to take ahead of their summit at the end of June.

"We're going to continue to make the case," said David Plouffe, a senior Obama adviser said in a television interview.

"There will be progress made over the next couple days, but no one should expect a firm resolution," he said.

Chinese President Hu Jintao in a newspaper interview over the weekend said G20 members should address the debt crisis in a "constructive and cooperative way, encourage and support efforts made by Europe to resolve it and send a signal of confidence to the market".

Japan backed that call.

"We (Chinese Vice Premier Wang Qishan and I) agreed to seek further efforts from euro zone, Germany in particular, as stability in Europe is indispensable," Finance Minister Jun Azumi said as he arrived in Mexico for the G20 summit.

World Bank President Robert Zoellick was far more forceful, calling it "an absolutely critical time" and warning Europe not to squander this opportunity for decisive action.

"We are waiting for Europe to tell us what it is going to do," said World Bank President Robert Zoellick.

"The danger we're creating is the danger of policymaking that is increasing uncertainty and making markets more nervous, which has a negative feedback loop," he said on Sunday at a business meeting on the sidelines of the G20 summit.

Europe's debt crisis has underscored the need for a bigger war chest at the International Monetary Fund. Leaders are set to confirm they will double the IMF's firepower with an extra $430 billion in loans even though some emerging nations are frustrated with the slow pace of winning more power at the global lender.

ACTION PLAN

The G20 leaders are expected to adopt a Los Cabos Action Plan, pledging to promote economic growth and jobs, investing in infrastructure and promoting trade, while sticking to its pledges to bring down budget deficits,.

In a hint of flexibility on its austerity push, Germany indicated a readiness to give Athens more time to implement the tough economic reforms required under its 130 billion-euro European Union/IMF bailout. These terms were the central battleground issue in the Greek election campaign.

German Foreign Minister Guido Westerwelle left no doubt that Greece must stick to the terms of the bailout if it wants to stay in the euro currency, but he added: "I can imagine that we would talk about the time axes once again."

This would be welcome to the United States and other G20 countries, which have warned that cutting spending too quickly can set off a vicious cycle of recession, escalating deficits, social and political upheaval and spreading global risk.

Softening the EU's austerity drive also is a priority for new Socialist French President Francois Hollande, whose hand was strengthened on Sunday by a resounding leftist victory in parliamentary elections.

Even if the timetable is eased, Greece will still have to make budget cutbacks that so far have plunged the country into recession and pushed unemployment over 20 percent. It must first form a government, which should happen in coming days, before the EU or the IMF would have discussions.

European leaders and the IMF said they would work with Greece to restore the country to growth.

Business leaders from more than 400 companies meeting on the sidelines at Los Cabos urged the G20 to deliver results.

"Over the next few days we will see whether the world can come together or come apart," said World Economic Forum Managing Director Robert Greenhill.

(Reporting By Stella Dawson; Additional reporting Lesley Wroughton and Tetsushi Kajimoto; Jan Strupczewski in Brussels; Jason Lange in Washington and Benjamin Kang in Beijing; Editing by William Schomberg and Padraic Cassidy)