# What is inflation, and how does it affect your money?

Source: https://koshex.com/blog/inflation-definition · Published 3 February 2023 · 9 min read

Inflation is the rate at which prices in general rise over a period, usually a year, so the same rupee buys less. In India the Reserve Bank of India (RBI) aims to keep consumer price inflation at 4%, within a band of 2% to 6%. If your money grows slower than prices, you lose buying power.

## Key takeaways

- Inflation is the rate at which prices in general rise over a period, usually a year, so the same rupee buys less.
- The Reserve Bank of India (RBI) aims for 4% consumer price inflation, within a 2% to 6% band kept for 1 April 2026 to 31 March 2031.
- Consumer prices were 4.82% higher in August 2026 than a year earlier, a provisional figure released on 14 September 2026.
- A real return is what your money earns after rising prices are taken out. ₹1,00,000 at an assumed 7% for 10 years is worth about ₹1,10,462 in today's prices at an assumed 6% inflation, before tax.
- The deposit insurer, DICGC, covers bank deposits up to ₹5,00,000 per depositor per bank, not company deposits. It does not protect what the money buys.

When prices rise, each rupee you hold buys a little less than before. That is inflation: the rate at which prices in general rise over a period, usually a year. In India the Reserve Bank of India (RBI) aims to keep consumer price inflation at 4%. Its band runs from 2% to 6%. Your money has to grow faster than prices before it buys more.

## What is inflation?

Inflation is the rate of increase in prices over a given period of time. That is how an International Monetary Fund (IMF) explainer puts it.

Here is what it does to a shopping bill. Say ₹100 buys a basket of groceries and household items today. If prices rise every year at 4%, which is the RBI's target, the same basket costs ₹148.02 after 10 years and ₹219.11 after 20. At 6%, the top of the RBI's band, it costs ₹179.08 after 10 years and ₹320.71 after 20.

| Assumed yearly inflation | Cost of today's ₹100 basket after 10 years | After 20 years |
| --- | --- | --- |
| 4% | ₹148.02 | ₹219.11 |
| 6% | ₹179.08 | ₹320.71 |

Both rates are assumptions for the arithmetic. They are reference points, not a forecast of what prices will do.

Turn it around and the loss shows up in your cash. At an assumed 6% a year, ₹100 kept idle for 10 years buys only what ₹55.84 buys today. After 20 years it buys what ₹31.18 buys today.

Deflation is the opposite: prices falling. Disinflation means inflation is slowing, so prices still rise, only more slowly.

## What causes inflation?

Prices are pushed up when costs rise and pulled up when demand runs ahead of what the economy can produce. The IMF explainer calls these two routes cost-push and demand-pull.

In cost-push inflation, a disruption to supply starts the rise. A jump in oil prices is one example.

In demand-pull inflation, people want to buy more than the economy can make. The strain on resources shows up as higher prices.

Core inflation is a related measure. It leaves out prices set by the government and the more volatile ones, such as food and energy. That shows the underlying, persistent trend. It is the IMF explainer's description of the term.

Interest rates feed into demand too. An RBI Bulletin article makes the point. Its authors, not the RBI, say a lower cost of funds for borrowers raises investment and consumption demand. Eventually that lifts both output and prices.

## How is inflation measured in India?

India's main measure of retail inflation is the Consumer Price Index (CPI). The National Statistics Office, part of the Ministry of Statistics, compiles it every month. It tracks the prices of a fixed basket of everyday household spending.

The current series uses 2024 as its base year, written as 2024=100. The basket covers food and beverages, clothing and footwear, housing and fuel, health, transport, communication, education, restaurants and more. Field staff collect prices on a weekly roster from about 1,400 urban markets, including online ones, and 1,465 villages across all States and Union Territories.

The RBI's target is set in terms of consumer price inflation. Under the RBI Act, the Central Government decides it in consultation with the RBI, once in five years.

There is a second measure. The Wholesale Price Index (WPI) tracks the prices of goods sold in bulk, before they reach shops. The commerce ministry's Office of the Economic Adviser compiles it, with 2022-23 as the base year. It covers goods only, not services, so it can move quite differently from the CPI.

## What is the inflation rate in India now?

Consumer prices were 4.82% higher in August 2026 than a year earlier. That is the provisional all-India CPI figure, released on 14 September 2026. Rural inflation was 5.23% and urban 4.31%.

The WPI for the same month showed 9.92%, also provisional. The two can move quite differently. The WPI tracks wholesale prices of goods only, before they reach shops; the CPI tracks what households pay, services included.

One month's figure is not a forecast. The figure for September 2026 is due on 12 October 2026, or the next working day if that is a holiday.

On the target, the Central Government kept the 4% figure and the 2% to 6% band on 25 March 2026. They hold from 1 April 2026 to 31 March 2031. The RBI's primary objective is price stability, while keeping in mind the objective of growth.

## How does inflation affect your savings and FD?

Inflation does not shrink the rupee amount in your account; it lowers what that amount buys when prices rise faster than your interest. Deposit cover is a separate matter. DICGC, the deposit insurer, covers bank deposits up to ₹5,00,000 per depositor per bank, principal and interest together. It does not cover company deposits, including those of NBFCs. Either way, the cover is on the rupees and does nothing for their buying power.

An FD's rate is fixed when you open it, for its full term. If inflation climbs after that, your rate does not follow it.

Under the Income-tax Act, 2025, for a resident individual in the 2026-27 tax year, bank FD interest is taxed at your slab rate. That is the income-tax rate for your income band. A bank also deducts 10% TDS once your FD interest from it crosses ₹50,000 in a year, or ₹1,00,000 for senior citizens. TDS is tax deducted before the money reaches you. If your total income is not taxable, you can give the bank a declaration to stop the deduction.

For a worked after-tax example, read [how risk and return trade off in safe investments](https://koshex.com/blog/what-are-the-safest-investments-with-high-returns-in-india). For the FD side in particular, see [how inflation affects a fixed deposit](https://koshex.com/blog/how-does-inflation-affect-fixed-deposit). The [fixed deposit calculator](https://koshex.com/calculators/fixed-deposit-calculator) shows what an FD earns in rupees.

## What is a real return?

A real return is what your money earns after rising prices are taken out. A bank statement shows the rupee growth. The real return is what is left in buying power.

Take ₹1,00,000 in an FD at an assumed 7% a year for 10 years. With no inflation it grows to ₹1,96,715. These figures are before tax; tax on the interest at your slab rate would leave less. Now assume prices rise 6% a year over the same decade. In today's prices, that ₹1,96,715 is worth about ₹1,10,462. Against an assumed 4%, it is about ₹1,34,392.

These figures come from the method the [lumpsum calculator](https://koshex.com/calculators/lumpsum-calculator) uses: its inflation input subtracts inflation from the return, which is a close approximation, hence "about".

## How can you protect your money from inflation?

Only by holding things that have a chance of growing faster than prices, and each carries a risk. Shares and funds can fall in value; an FD's fixed rate can fall behind prices.

**Equity** means shares of companies, directly or through equity mutual funds. AMFI, the Association of Mutual Funds in India, prescribes illustration rates for fund houses to use. They are the mean of 10-year rolling returns from 1 June 2014 to 31 May 2024. That is 12.42% for the Nifty 50 index and 12.62% for the Sensex. These are past figures for indices, not funds, and past performance may or may not be sustained in future. A fall is the other side of that chance. The Nifty 50 price index fell 38.4% between 14 January and 23 March 2020, from 12,362.30 to 7,610.25.

**Debt funds** are mutual funds that lend money to governments, banks and companies by buying bonds and similar paper. AMFI states that mutual fund schemes are not assured return products, and their value may go up or down. Under the Income-tax Act, 2025, a fund holding more than 65% in debt has its own rule. Gains on its units bought on or after 1 April 2023 are taxed at your slab rate, whatever the holding period.

**Gold** is another option people consider. HDFC's and Tata's gold exchange traded fund (ETF) factsheets showed their gold ETFs at High on the riskometer as on 31 August 2026. The riskometer is the risk label SEBI makes every fund show, on six levels from Low to Very High. For more on where gold fits, read [what gold does in a portfolio](https://koshex.com/blog/gold-in-your-portfolio).

**FDs** can keep pace when the interest left after tax beats inflation. That depends on the rate you lock in and your tax slab; the real return figures above are before tax.

How much of each fits depends on your goal, your timeline and how large a fall you can sit through. [How to start investing](https://koshex.com/blog/how-to-start-investing-a-beginners-guide) walks through the steps, and [risk tolerance](https://koshex.com/blog/what-is-risk-tolerance-and-why-is-it-important) explains the last factor. The Koshex app runs a risk-profile questionnaire, and a distributor can help you choose a fund that suits your goal and timeline. A distributor is a registered intermediary that helps you buy and manage funds. For the risks of funds in general, see [the risks in mutual funds](https://koshex.com/blog/what-are-risks-involved-in-mutual-funds).

If retirement is the goal, [retirement planning and inflation](https://koshex.com/blog/retirement-planning-beat-the-inflation) covers it separately.

## How do inflation and interest rates affect each other?

The RBI raises or holds its repo rate to bring inflation back toward 4%. Those moves change what loans cost and what bonds are worth. The repo rate is the rate at which the RBI provides liquidity under its liquidity adjustment facility (LAF) to all LAF participants. They pledge government and other approved securities as collateral.

Under the RBI Act, a six-member committee, the monetary policy committee (MPC), sets the repo rate needed to reach the inflation target. The policy repo rate has been 5.25% since 5 December 2025, as of 1 October 2026. The RBI says a change spreads through the whole financial system and influences aggregate demand, a key determinant of inflation and growth.

Bond prices react to rate changes as well. [How interest rates affect mutual funds](https://koshex.com/blog/how-interest-rates-affect-mutual-funds) covers that link, and what it means for the funds you may hold.

## Frequently asked questions

### What is inflation in simple words?

Inflation is the rate at which prices in general rise over a period, usually a year, so the same rupee buys less. If a basket of goods costs ₹100 today and prices rise 4% a year, it costs ₹148.02 after 10 years. The 4% is an assumption for the example.

### What is the inflation target in India?

The target is 4% consumer price inflation, with an upper tolerance limit of 6% and a lower limit of 2%. On 25 March 2026 the Central Government retained both for 1 April 2026 to 31 March 2031. The RBI's primary objective is price stability, while keeping in mind the objective of growth.

### What is deflation, and is it good?

Deflation means falling prices. An IMF explainer says it is not desirable either, because when prices are falling, consumers delay purchases if they can, expecting lower prices later. Disinflation is different: prices still rise, but more slowly.

### What is the difference between CPI and WPI?

The CPI tracks retail prices of a fixed household basket. The National Statistics Office compiles it, with 2024 as the base year. The WPI tracks goods sold in bulk and covers goods only. The Office of the Economic Adviser compiles it, with 2022-23 as the base year. For August 2026 the CPI showed 4.82% and the WPI 9.92%, both provisional.

### What is core inflation?

Core inflation focuses on the underlying and persistent trend. It excludes prices set by the government and the more volatile prices of products such as food and energy. This is an IMF explainer's description of the term.

### Does a fixed deposit beat inflation?

It depends on three things: the rate you lock in, the tax slab you pay on the interest, and how fast prices rise. Take ₹1,00,000 at an assumed 7% for 10 years, which grows to ₹1,96,715 before tax. With assumed 6% inflation it is worth about ₹1,10,462 in today's prices. Change either assumption and the answer changes.

### Is gold a good hedge against inflation?

Gold carries risk of its own, and no one can promise it will keep pace with prices. HDFC's and Tata's gold exchange traded fund (ETF) factsheets showed their gold ETFs at High on the riskometer as on 31 August 2026. Nothing about gold is assured.

### How big a pay rise do I need to keep up with inflation?

It depends on how fast the prices you pay rise. As one example, August 2026 CPI inflation was 4.82% year on year. At that rate, a monthly salary of ₹50,000 would need to become about ₹52,410 to buy the same basket a year later. That figure is one month's reading, not a forecast for next year.

*This article explains how things work; it is not advice to buy or sell any investment. Mutual fund investments are subject to market risks, read all scheme related documents carefully.*