Mumbai: The Reserve Bank of India (RBI), in its midyear review of the Monetary Policy 2003-04, has not made any change in the bank rates and the cash reserve ratio (CRR).

The bank and repo rates remain at 6 and 4.5 per cent, respectively. The CRR remains at 4.5 per cent. The RBI has revised the gross domestic product (GDP) growth from 6 per cent to 6.5-7.0 per cent for 2003-04. The CRR has also been left unchanged at 4.5 per cent.

Announcing his maiden policy, RBI governor Dr Y V Reddy said the apex bank will continue with the present stance of preference for a soft and flexible interest environment.

The Governor stated that the inflation outlook remains benign. The RBI has projected an inflation rate of 4-4.5 per cent with a possible downward bias as compared to the earlier projection of 5-5.5 per cent.

The governor made it clear that he is keen to see the benefits of the lower rate regime trickle through to all segments of borrowers and not just stay limited to corporates and housing loan-takers.

On the borrowing programme, the RBI said: "The persistence of large aggregate borrowings of the central and state governments continues to be a matter of concern. It is essential to pursue, promptly and with resolve, fiscal consolidation from a medium-term perspective."

"There is a need for widening the revenue base, rationalisation of expenditure and enhancing productivity of public investment already made or to be made in both commercial and social sectors," the RBI said.

Referring to the foreign exchange market, the RBI said all foreign currency loans above $10 million by banks can be extended only on the basis of a well-laid policy of the bank boards on hedging, except in some cases.

These cases are where forex loans are extended to finance exports and banks may not insist on hedging but assure themselves that such customers have uncovered receivables to cover the loan amount and secondly where such loans are extended for meeting of forex expenditure, the apex bank said.

On the prime lending rate, the RBI said banks may price floating rate products by using market benchmarks in a transparent manner. It also clarified that banks have the freedom to price their loan products based on time-varying premia and relevant transaction costs.

The RBI said since lending rates for working capital and term loans can be determined with reference to the benchmark prime lending rate (PLR) by taking into account term premia and or risk premia, a need for multiple PLRs may not be compelling.

On exports and imports, the RBI said it is difficult to anticipate the behaviour of capital flows. The positive sentiment on India should augur well for continued buoyancy, but some moderation should not be ruled out, the apex bank added.

Beginning 1 January 2004, all exporters may write off outstanding export dues on their own and also extend the normal period of realisation beyond 180 days, provided the aggregate value of such write-offs and delay in realisation does not exceed 10 per cent of their export proceeds in a calendar year.

On the overall macroeconomic environment, Reddy said it has improved during the year with a positive outlook on both the domestic and external fronts. "The point-to-point wholesale price index (WPI) inflation is expected to moderate by the end of the year.

"The gains obtained in recent years from the reining in of inflationary expectations need to be consolidated and reinforced as inflationary expectations can turn adverse in a relatively short time if noticeable adverse movements in prices take place. Hence, a continued emphasis on vigil on the price level is essential."

The governor added that the investment climate during the year has improved as reflected in the functioning of various segments of the financial market. "As productivity gains have been significantly harnessed from large-scale corporate restructuring from investment made, there could be a revival of investment demand at this juncture."

The governor indicated that though credit growth remained subdued till August 2003, there are since some signs of pick-up in non-food credit. "There is a need to further improve the institutional as well as incentive mechanisms in banks to strengthen credit delivery to small and medium enterprises, infrastructure and agriculture. In this regard, it is important that a conducive credit culture is nurtured among financial intermediaries, corporates and households."

He added that apart from subdued credit growth, which will continue to cause concern, the overall rigidity in the downward movement of lending rates as well as inadequacy in quality of service to some sections coupled with a reduction in deposit rates require introspection and immediate action on the part of all financial intermediaries. "In this regard, credible actions, particularly by the commercial banks, will be essential to make adequate progress in credit delivery and appropriate transparency in the pricing of credit."