At its review of monetary policy on March 17th the Reserve Bank of India (RBI, the central bank) raised its main policy rates by 25 basis points. The repurchase (repo) rate now stands at 6.75%, while the reverse repo rate is now at 5.75%. Several factors are likely to have led the RBI to push up interest rates again despite signs of a moderation in economic activity. First and foremost, inflation remains above the RBI's target rate of 5%. Wholesale price inflation rose unexpectedly to 8.2% year on year in January, and it appears unlikely to fall to 7% by March as the RBI had hoped. The rate of wholesale price inflation in December has been revised up to 9.4%, from 8.4% initially. India's provisional wholesale price data are often adjusted upwards, and this means that inflation in January and February is also likely to have been higher than the provisional figures suggest. There is also concern that inflation will spread beyond food items (currently the primary driver of rapid overall inflation) and will begin to push up wages and the price of industrial inputs as well. In February manufacturing inflation reached 4.9% year on year, up from 3.8% in January.

The RBI is also likely to have taken into consideration the government's plans to continue to deregulate diesel prices-a move that will inevitably add to inflationary pressures. High international oil prices have pushed up India's oil import bill and, with it, domestic inflation. These factors, combined with a recent sharp fall in foreign direct investment (inflows of which dropped by 48% year on year in January), have weighed on the value of India's currency, the rupee. The possibility of a weaker rupee in 2011 is likely to have been another factor behind the RBI's decision to raise interest rates, as a weaker local currency would boost imported inflationary pressures. The central bank's next scheduled monetary policy meeting is on May 3rd.