* Rupee ends at 54.01/02, down from session high of 53.66
* Outlook still positive on govt reforms, Fed's QE3
* HSBC raises end-Dec rupee fcast to 52 from 57 (Updates closing prices, minor recasts throughout)
By Subhadip Sircar
MUMBAI, Sept 17 (Reuters) - The Indian rupee rose on Monday but retreated from a four-month high below 54 to the dollar hit earlier in the session after the central bank kept interest rates on hold, dashing some of the positive impact from the government's major reforms.
The Reserve Bank of India disappointed investors by keeping its key repo rate on hold, choosing instead to inject more liquidity by lowering the banks' cash reserve ratio by 25 basis points.
The decision cut some of the rupee's gains, although investors still greeted with optimism the measures announced by India on Thursday and Friday, which included raising diesel prices and steps to attract foreign direct investment.
"Overall there may be some disappointment after today's RBI announcement but I would still expect any USD/INR bounce to be sold into, particularly after the positive reforms announced around FDI and diesel prices etc," said Jonathan Cavenagh, currency strategist at Westpac Banking Corp.
"The market has been starved of good domestic news out of India for a long time, hence the positive sentiment in recent session can run further in our view."
The rupee closed trade at 54.01/02 per dollar, w eakening from a session high of 53.66 hit earlier in the session that had marked its strongest level since May 15.
Still that was enough to post a second session of gains after closing on Friday at 54.30/31.
Despite higher-than-expected August inflation data on Friday, some investors had hoped the RBI could cut rates as early as Monday given the central bank was believed to be on hold until the government acted on fiscal reforms.
Last week's actions still failed to spur the RBI to act in boosting India's flagging economic growth, but analysts still remained optimistic about the rupee's outlook.
The government's big bang reforms -- including opening up the retail and aviation sectors to foreign direct investment -- are expected to usher in flows from overseas, which should help narrow down the country's cu r rent account deficit, which hit a record $21.7 billion in the March quarter.
India's benchmark stock index hit a new 14-month high on Tuesday, with provisional exchange data showing foreign investors bought a net 28.3 billion rupees ($520.08 million) on Friday, their biggest single day purchase since July 3.
The government's long-awaited action comes shortly after the Federal Reserve announced a new asset purchase programme that could usher a period of global liquidity flows.
Analysts say both actions together could provide a major push to the beleaguered rupee, which has rallied as much as 3.2 percent against the dollar since its Thursday close but is still down around 12 percent from levels seen last September.
Macquarie advised investors to go long on the rupee versus the dollar, while HSBC raised its rupee forecast to 52 to the dollar by-end December from 57 previously. ($1 = 54.4150 Indian rupees)
In the offshore non-deliverable forward market, the one-month contract was at 54.12 while the three-month was at 54.65.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54 with a total traded volume of around $6.4 billion. (Editing by Rafael Nam)