RBI has forecasted an inflation of 7% at the end of March 2011 and its policy rate at 6.5% in its monetary policy on Tuesday.

It also said that this is the tough time for economy with current account deficit expected to be 3.5% of the GDP. Current account deficit is the difference between exports earnings and import payments.

RBI has tried to control the inflation and make money dearer by increasing its repo rate and reverse repo rate.

The interest rate was raised by 6.25% to 6.50% which the banks pay to the RBI for their borrowings and similarly interest rate at which RBI would borrow from the banks is also raised from 5.25 to 5.50%.

The main reason for inflation analyzed by RBI is the increasing prices of international oil. With this increase prices of commodities are going to be on the top.

If we need to maintain the growth route we have to create a policy which will increase the export earnings through diversification with wise imports. Although this step is very difficult for the economy, but if the growth of the economy is strong then inflation can last out to a certain point.

RBI has posted a growth rate of 8.5% for 2010-2011, but experts comment that this is not enough to handle inflation rate of 7%.

The central bank also suggests shifting the preferences from short-term capital inflows to long-term foreign direct investment (FDI).

Watching inflation rate RBI expressed that it is tough for the economy to deal with increasing inflation in 2011. There is a need for the government to improve the supply side by an intelligent management.