Reddy says 3 per cent inflation rate is ideal

Inflation should be ideally and optimally closer to 3 per cent over a period so that global integration becomes smoother, Reserve Bank of India Governor Y V Reddy, said today. He was speaking on the sidelines of a conference in Pune.

"The target for this year is to contain inflation within the 5 per cent range. In the medium term, it should be between 4 and 4.5 per cent," he said.

The annual rate of inflation for the week ended June 16 dipped to 4.03 per cent from 4.28 per cent in the previous week. Both the RBI and the finance ministry are keen on containing the rising inflation without hurting growth.

The central bank has raised the key lending rates five times during the last year in an attempt to contain the inflationary expectations. It last increased the overnight lending rate to a five-year high of 7.75 per cent on March 30.

While bankers continue to debate whether the interest rates in India have peaked or stabilised, ICICI Securities has stated in its recent report that policy rates in India are yet to peak. In the near term though, the RBI is unlikely to tinker with the rates, thanks to softening of domestic inflationary pressures.

Although headline inflation has dipped below 4.5 per cent, this could be temporary. Inflation is likely to remain below the RBI's targeted five per cent for the next three months.

Apart from the base effect, the manufacturing price rise has slowed down in line with the sharp rupee appreciation and decline in import parity prices. However, the farm prices could still pose a risk.