* S&P/ASX 200 index up 0.1 pct
* Banks mixed, retailers up a touch; miners mostly down
SYDNEY May 6 (Reuters) - Australian shares held steady in subded trade on Tuesday morning, underpinned by modest gains in consumer stocks, as investors looked ahead to the Reserve Bank of Australia's policy-setting meeting later in the day.
Australia's big four banks reversed earlier gains, with Commonwealth Bank of Australia nearly flat. Westpac Banking Corp was the only one to hold gains, up 0.6 percent.
IG market strategist Evan Lucas said in a note that banks were up earlier this morning after being sold off in the past week, though the rebound lacked conviction.
Recent analysts' downgrades of some of the big banks and concerns that earnings growth may not keep pace with the record rally in stock prices triggered a wave of selling.
"Valuations, yield and growth are all hitting the limit at the all-time highs...despite the fact the banks have had very solid results, it's hard to see them breaching these levels," Lucas said.
The S&P/ASX 200 index added 3.2 points to 5,465.4 by 0222 GMT. The benchmark eked out a slim 0.1 percent rise on Monday.
The market was supported by retailers. Supermarket chain Woolworths Ltd rose 0.4 percent, and electronics retailer JB Hi Fi Ltd gained 0.6 percent.
The absence of catalysts kept most investors sidelined as they looked ahead to the Reserve Bank of Australia's (RBA) policy decision, though it is considered almost certain to leave the cash rate unchanged at 2.5 percent and maintain a steady policy outlook.
James McGlew, executive director of corporate stockbroking at Argonaut, said investors were betting that the federal government would not introduce a proposed levy to tax high income earners to tacle a rising deficit.
Next week the coalition government will hand down its first budget since winning the election in September last year, and has already flagged a series of spending cuts.
"If it's going to be solved by income tax, the natural reaction is for consumption to decrease," McGlew said. "Perhaps there is a perception now that the government is going to be looking elsewhere rather than these deficit levies they are proposing at the moment."
Australian department store retailer David Jones Ltd added 0.3 percent after posting a 4.1 percent rise in third-quarter sales. It also said a takeover proposal from South Africa's Woolworths Holdings Ltd has been approved by Australia's foreign investment review body.
Miners were a drag on the market, with Rio Tinto Ltd down 0.6 percent and Fortescue Metals Group sliding 1.3 percent. BHP Billiton bucked the trend and edged up 0.1 percent.
Elsewhere, rare earth producer Lynas Corp Ltd lost 3.0 percent after it said it would undertake a fully underwritten share purchase plan to raise a minimum of A$30 million together with a placement to raise up to A$10 million.
New Zealand's benchmark NZX 50 index slipped 0.4 percent to 5,178.1.
(Reporting by Maggie Lu Yueyang; Editing by Richard Pullin & Shri Navaratnam)