Five per cent inflation possible, says Reddy

The Reserve Bank of India (RBI) Governor Y V Reddy said the inflation target of 5 per cent was a self-imposed ceiling of the central bank in order to be in alignment with global inflation levels as the country integrates with the global economy.

"A five per cent inflation is certainly possible. If you want to strengthen the financial sector and integrate financial sector, then the inflation rate has to be more in line with the world. If inflation is more than 6 per cent, how is it possible," said Reddy.

The central bank lowered its inflation tolerance levels in its annual policy statement for 2007-08. For 2007-08, inflation is to be contained close to 5 per cent compared to 5-5.5 per cent for 2006-07. For the medium term also, the RBI has lowered its inflation target to 4-4.5 per cent from 5 per cent earlier.

However, headline inflation held at 6.09 per cent for the week-ended April 14, from the previous week. Reddy said that the monetary policy has some role to play in outcome of inflation.

Even as the central bank has been following a policy of withdrawal of monetary accommodation leading to a change in interest rate cycles, the banking system had been strengthened.

The regulator had to use a peculiar combination of discouraging credit to certain sectors where there are too much demand pressures and prices are moving too fast, while encouraging more credit to sectors that would augment supplies and lead to better demand supply balance, said Reddy.

This is a more pragmatic approach rather than an ideological approach, he added.

The financial sector is moving with inherent strength and efficiency. The next step would be to develop the corporate debt market and settlement of foreign exchange transactions here, said Reddy, which would not have been possible 7-8 years back. In the forex market, there is greater flexibility in rates.

According to the governor, the country is in a state of self-accelerating growth phenomenon. The central bank was confident of an 8.5 per cent growth rate, he said.

However, the financial sector has to move in tandem with the real sector if growth and diversification of the sector is to be achieved, said Reddy.