The Reserve Bank of India kept the key repo rate -- at which it lends to commercial banks -- at 8.0 percent, as had widely been predicted by economists.
"The persistence of inflationary pressures even as growth has moderated, remains a key challenge," RBI governor Duvvuri Subbarao said after the policy review in Mumbai.
"Managing inflation and inflation expectations must remain the primary focus of monetary policy," he added in a statement.
The lack of a rates cut offered little cheer to the government after the Indian economy grew at just 5.5 percent in the quarter to June -- down from near double-digit rates between 2005 and 2011.
"Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone," India's Finance Minister P. Chidambaram said in reaction to the RBI decision.
Chidambaram said he had not read the policy statement in its entirety but "if it holds out hope for the future I look forward to that future".
The bank moved to increase liquidity in the banking sector by cutting its cash reserve ratio -- the amount that banks have to keep aside as deposits -- by 25 basis points to 4.25 percent.
This will inject 175 billion rupees ($3.3 billion) into the banking system, the governor said.
Subbarao also told reporters that a rates cut was likely next year.
"There is scope for monetary policy easing in the fourth quarter (January to March) of 2012 to 13", he said.
C. Rangarajan, head of Prime Minister Manmohan Singh's economic advisory council, said the RBI had taken a "cautious stance".
"The RBI is perhaps waiting for a period or an opportunist moment when there could be sustained decreases in interest rates," Rangarajan told the CNBC TV-18 business channel.
Banking, auto and property stocks fell after the announcement and the benchmark 30-share Sensex index closed down 1.1 percent at 18,430.85.
The government on Monday had sent a strong signal to the RBI to take note of its fiscal consolidation plans after a slew of economic reforms, which included opening up foreign investment in retail, aviation and insurance.
But the central bank has kept rates on hold since April -- when it cut them for the first time in three years -- insisting inflation must recede.
Causing huge hardship to the poor, India's inflation accelerated to a 10-month high of 7.81 percent in September, spurred by a hike in state-controlled diesel prices to lower fuel subsidies.
The RBI also cut its GDP growth forecast for Asia's third-largest economy to 5.8 percent for the current fiscal year, from 6.5 percent previously.
The bank has consistently put the onus on the government to lower the fiscal deficit and boost investor confidence before it lowers rates, and Subbarao acknowledged the recent reforms as a good step forward.
"As the measures already announced are implemented and further reforms are initiated, they should help improve the investment climate further," his statement said.
Sonal Varma, economist with Nomura Securities, said the "prudent" RBI decision was "fortifying its inflation-fighting credibility".