Desperate to neutralise Grace Stewart's third-quarter strike, India's coach Harendra Singh recalled goalkeeper Savita Punia when only four minutes were left in the match but his players could not cash in on the chances that came their way.
India will now clash with England for a bronze medal on Saturday.
The play was mostly restricted to India's half with Australia dominating the contest with high ball possession.
Coach Harendra was not an unhappy man after the match.
"We lost but the team did not play badly. A 1-0 result against a team like australia on home turf is not that bad. We have been finishing 5th in the past two games. So it's nice to be in medal bracket this time. Let's see how it goes from here," said Harendra.
The Indian team saved two back-to-back penalty corners in the early minutes of first quarter after Vandana created a move inside the Australian striking circle. Her move, however, lacked support to pose a serious threat.
The Indian defence remained solid to keep an aggressive Australia at bay, though, passing upfront was not fluent for the Rani-led team.
The hosts kept attacking the Indian half and Grace Stewart missed a shot in front of the Indian goal but the Indians came out of the first quarter unscathed.
The defending champions remained offensive, restricting the play to India's half but still could not penetrate the opposition defence as the second quarter too remained goal-less.
Australia earned their third penalty corner of the match in the third quarter but an onrushing Deep Grace Ekka foiled the attempt. Stewart broke the deadlock by tapping a high cross, straight into the Indian goal.
India earned back-to-back penalty corners in the fourth quarter but squandered both as the opportunity to score an equaliser went abegging. They got another PC but could not utilise that also.
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