Reserve Bank of India governor Y V Reddy said on Monday that banks should bring down transaction costs, spread the benefit of reduction in interest rates to more customers and "quickly build" investment fluctuation reserve to deal with interest rate risks.

The central bank would continue with the stance of Monetary and Credit Policy announced in April 2003 by the then Governor Bimal Jalan, Reddy said.

Transaction costs are a drag on the economy and it is time to put emphasis on their reduction, which can facilitate the growth of gross domestic product by two-three per cent, Reddy told reporters after releasing the mid-term review of Monetary and Credit Policy for 2003-04.

As part of efforts to cut transaction costs, RBI would set up a standing committee to conduct performance audit in public service and directed banks to form an ad-hoc panel to carry out procedure audits, which should complete the work in six months, he added.

The measure on export follow-up allowing write-offs up to 10 per cent in a calender year was a move in this direction (to bring down transaction cost), he said.

On the reduction of lending rates by banks, RBI governor said there was rigidity in downward movement of lending rates and benefits of reduction of lending rates have reached only to housing and prime corporates compared to other sectors.