The Reserve Bank of India has left bank rate and cash reserve ratio unchanged at 6 per cent and 4.5 per cent, respectively.

Announcing the mid-term Monetary and Credit Policy on Monday, the RBI has revised the gross domestic product growth from 6 per cent to 6.5-7.0 per cent for 2003-04.

Stating that 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.

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

This was Dr Y Venugopal Reddy's first mid-term Credit Policy since he took over the reins at India's central bank.

Analysts had expected a softening of interest rates with the nation's gross domestic product well on course to rise above 6 per cent showing the strength of the economy. Also lower interest rates would have helped boost investment further.

Global interest rates in the United States, the United Kingdom, Japan and other countries range from 1.5 per cent to 3 per cent.

In the annual Monetary Policy announced for the year 2003-04 on April 29, Dr Bimal Jalan, the then RBI governor, had reduced the bank rate by 25 basis points to 6 per cent.

On the borrowing programme, 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, Reddy said.

"There is a need for efforts in the direction of 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 apex bank said.

Referring to the foreign exchange market, 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.

RBI said in order to facilitate deepening of the government securities market, it has proposed to permit sale of G-Secs, already contracted for purchase, provided such purchase contract was either guaranteed by an approved central counterparty like Clearing Corporation of India Ltd or the apex bank.

On the investment fluctuation reserve, RBI has asked banks to build up IFR so that they are better positioned to meet interest rate risks.

RBI has also proposed to adopt the 90-day norm for recognition for impairment for financial institutions with effect from year ending March 31, 2006.

RBI said the cash reserve ratio has also been left untouched at 4.5 per cent. On review of the current liquidity situation, it is felt to keep the present level of CRR unchanged.

On the prime lending rate, the apex bank 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.

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

Indian Banks' Association may advise members suitably, keeping in view the operational guidelines, it added.

In order to further improve the flow of credit to small-scale industries, it has proposed that banks may, on the basis of good track record and financial position of the SSI unit, increase the loan limit from Rs 15 lakh to Rs 25 lakh for dispensation of collateral requirement.

Referring to the deposits of foreign banks placed with SIDBI towards their priority sector shortfall, the apex bank said interest rate on these deposits would be in line with the bank rate as against the current level of 6.75 per cent.

SIDBI should also take appropriate steps to ensure that priority sector funds are utilised expeditiously and benefits of reduction in interest rates passed to borrowers, the apex bank added.