Question 1

What is the current inflation rate in India?

Accepted Answer

India CPI (Consumer Price Index) inflation has averaged 5-6% over the past decade. The RBI targets 4% inflation with a band of +/-2%. Urban inflation tends to be higher than rural. Food inflation has been particularly volatile. For long-term financial planning in India, using 6% as the inflation assumption is considered prudent for expenses, while using 4% for RBI target scenarios.

Question 2

How does inflation erode purchasing power?

Accepted Answer

Inflation erodes purchasing power — money held in savings loses value over time. At 6% inflation: Rs 1 lakh today buys the same as Rs 1.34 lakh in 5 years. In 10 years you need Rs 1.79 lakh. In 20 years, Rs 3.21 lakh. This means your investments must grow faster than inflation to maintain purchasing power. Fixed deposits at 6-7% barely keep pace with 6% inflation after tax.

Question 3

What is real return vs nominal return on investment?

Accepted Answer

Nominal return is the stated return before accounting for inflation. Real return = (1 + nominal return) / (1 + inflation rate) - 1. Example: FD at 7% nominal, 6% inflation → Real return = (1.07/1.06) - 1 = 0.94% real return. After 20% tax on interest, FD gives 5.6% post-tax, which is negative real return at 6% inflation. Equity mutual funds at 12% nominal give about 5.7% real return at 6% inflation.

Inflation Impact Calculator India — Purchasing Power & Real Returns

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