Reserve Bank of India Governor Y V Reddy on Thursday said the central bank is keeping a "close watch" on inflation, which is expected to be well below 5.0-5.5 per cent at the end of the current fiscal.

"The international commodity prices have seen a hardening of almost 20 per cent, but domestic conditions are favourable and we have cushions to handle the pressure," Reddy said on the sidelines of a lecture at the Indira Gandhi Institute of Development Research in Mumbai.

The RBI had projected inflation to be around 5.0-5.5 per cent at the beginning of the year and in the mid-term review scaled it down to 4.0-4.5 per cent with a downward bias.

Subsequently, the central bank also removed the bias, he said.

Referring to exchange rate, RBI governor said, "There is no target rate and it is market determined".

"We also ensure that there is no volatility (in the forex market)," he added.

The rupee has been appreciating against the US dollar recently and was currently hovering around the Rs 44.71/72 mark against the US currency.

On finalising the date for the monetary and credit policy for fiscal 2004-05, he said RBI was internally studying all issues and expects to announce it in a week's time.