The Reserve Bank of India (RBI, the central bank) has been tightening monetary policy since January 2010 in response to stubbornly high inflation. There were five increases in 2010 in the repurchase (repo) rate (the interest rate at which the RBI adds funds to the banking system), the most recent of them in early November; the repo rate now stands at 6.25%. We forecast that the repo rate will rise to 6.5% by the end of 2011. Assuming that the current inflationary surge abates, this will be sufficient to turn real interest rates positive. However, the RBI will remain mindful that higher interest rates could undermine the government's fiscal consolidation plan, encourage volatile capital inflows and exert upward pressure on the value of the rupee. Monetary policy will return to a more neutral setting in 2012-15.