Personal Finance

Inflation Explained for Indian Beginners (2025)

📅 December 24, 2025 ⏱ 10 min read

Your parents say "everything was so cheap back then." That's inflation - the invisible thief eating your money every day. This guide explains what it is, why it matters, and what you can do about it.

What is Inflation?

Inflation means prices going up over time.

More precisely: the same amount of money buys you less stuff than before.

Simple example:

Same money. Less milk. That's inflation.

Real-life shocker: Mumbai rent for a 1BHK in Andheri:

Same flat. 4.4x increase. Your salary didn't grow 4.4x, did it?

Why Inflation Happens

1. Demand vs Supply

When more people want something but there's limited supply, prices go up.

COVID example: Hand sanitizers jumped from ₹50 to ₹500 for 100ml. Everyone wanted it. Supply couldn't keep up.

Onion crisis: When crops fail, prices shoot from ₹20/kg to ₹80/kg. Less availability = higher price.

2. Cost Increases

When production becomes expensive, companies pass costs to you.

Fuel chain reaction:

3. Money Supply

When government prints too much money, each rupee becomes less valuable.

Simple logic: If everyone in your colony suddenly got ₹10 lakh cash, would the grocery store keep prices same? No. The shopkeeper knows everyone has more money, so prices go up.

How Inflation Is Measured in India

CPI (Consumer Price Index)

This tracks how much a typical household's monthly expenses have increased.

What's included:

What "6% inflation" actually means:

Reality check: Official CPI says 6%. But YOUR personal inflation might be 10-12% because school fees increase 10% annually, health insurance jumps 15%, metro rent rises 8%.

Your lived experience ≠ government statistics.

Why Inflation Matters to You

1. Impact on Savings

Brutal math:

After 10 years, ₹10 lakh's buying power becomes only ₹7.4 lakh.

True story: Someone kept ₹5 lakh cash from 1995 to 2025. Still ₹5 lakh in notes. But in 1995, it could buy a 2BHK flat. In 2025, it can't buy a bike. Inflation destroyed 90% of value.

2. Impact on Salary

Your salary must beat inflation or you're getting poorer.

Example:

If salary grows 7% but inflation is 6%, you're only growing 1% in real terms.

3. Impact on Daily Expenses

Then vs Now:

Painful truth: Your parents raised kids on ₹15,000/month in 2000. Try that today. Impossible.

Inflation vs Interest Rates

Why RBI Raises Rates

When inflation exceeds 6%, RBI increases interest rates to cool it down.

Process:

  1. RBI raises repo rate
  2. Banks raise loan rates
  3. People borrow less → Spend less → Demand drops → Prices stabilize

Real example: 2022 inflation hit 7.8%. RBI hiked rates from 4% to 6.5%. Home loan EMIs increased. People cut spending. Inflation fell to 5.5% by 2024.

Impact on Loans and FDs

Home loan pain:

FD benefit:

But: Inflation was 6-7%, so real return = only 0.5-1.5%. FDs barely preserve value.

How Inflation Affects Investments

Cash - Worst Performer

Keeping ₹10 lakh cash for 10 years = financial suicide.

At 6% inflation, it becomes worth ₹5.58 lakh in real terms.

Fixed Deposits - Barely Better

Math:

You're losing money, just slower than cash.

Equity - Only Long-Term Winner

Historical data (30 years):

₹10 lakh invested in 1995 Sensex = ₹2.1 crore today. Same in FDs = ₹50 lakh (real value after inflation = ₹13 lakh only).

Disclaimer: Equity has risk. Markets crash. But over 15-20 years, equity beats inflation. FDs don't.

Common Inflation Myths

Myth 1: "Inflation is always bad"

Wrong.

Moderate inflation (4-6%) is healthy. It encourages spending, signals demand, supports growth.

Bad inflation: Below 2% (stagnation) or above 8% (pain).

Myth 2: "Saving cash is safest"

Dangerously wrong.

Cash is least safe against inflation.

10-year comparison at 6% inflation:

Cash lost most. Equity won.

Myth 3: "Inflation doesn't affect me"

Everyone is affected:

Example: Dad retired in 2015 with ₹30,000/month pension. Comfortable then. In 2025, same ₹30,000 buys 40% less. Struggling now.

What Can Individuals Do About Inflation?

1. Awareness

Track your expenses. Calculate your personal inflation rate.

Example:

Awareness helps planning.

2. Long-Term Investing Mindset

Accept cash loses value. Whether you're starting with a ₹50,000 salary or more, some equity exposure is necessary to beat inflation over 10-20 years.

3. Avoid Panic Decisions

Don't:

Do:

Bottom Line

What inflation is: The invisible thief reducing your money's buying power over time.

Why it exists: Demand-supply gaps, rising costs, money supply expansion. Normal feature of growing economies.

Why you must understand it: If you ignore inflation, you'll save hard and still end up poorer in real terms.

The harsh truth:

Your ₹10 lakh today = ₹5.5 lakh in 10 years if left idle.

Understand inflation. Respect its power. Plan accordingly.

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