Since January 2010 the RBI has been tightening monetary policy in response to stubbornly high inflation. There were five increases in the repurchase (repo) rate (the interest rate at which the RBI supplies funds to the banking system) in 2010. The repo rate was raised further in January 2011 and again in March, so that it now stands at 6.75%. We forecast that there will be a further 25-basis-point increase in the first half of 2011, lifting the repo rate to 7%. Assuming that the current surge in inflation 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. Rates will be relatively stable in the second half of 2011 and during 2012, and will rise slightly in the latter years of the forecast period.