Inflation and real returns
Inflation is a tax nobody votes for. It doesn't take money out of your account; it quietly shrinks what that money can buy.
What inflation does
India's retail inflation, measured by the Consumer Price Index, has averaged roughly 5 to 6% a year over the last decade. Some costs rise faster: school and college fees, hospital bills and rents in big cities often rise 8 to 10% a year.
At 6% inflation, ₹1 lakh sitting in a locker buys only about ₹56,000 worth of today's goods after ten years. The note is the same; its power isn't.
After 10 years of 6% inflation, ₹1 lakh buys what ₹55,839 buys today.
Nominal and real returns
The nominal return is the number on your statement. The real return is what's left after inflation. As a quick approximation, real return ≈ nominal return − inflation.
A savings account at 3% during 6% inflation has a real return of about −3%. A fixed deposit at 7% taxed at 30% gives about 4.9% after tax, which is about −1% after inflation. Safe products protect your rupees; they don't always protect your purchasing power.
Beating inflation over the long run
To grow purchasing power over long periods, you need assets that tend to rise faster than prices: businesses (equity), and to a lesser extent property and gold. Their catch is volatility: they can fall sharply in the short term.
That's why the time horizon matters. Money needed next year should stay safe even if it loses a little to inflation. Money needed in fifteen years can't afford to stay safe, because inflation will do more damage than volatility.
Key takeaways
- 1Real return ≈ nominal return − inflation.
- 2Some goals (education, health) inflate faster than CPI.
- 3Long-term money has to outgrow inflation, not just avoid losses.
Try it with your own numbers
Finish this lesson
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Educational content, not investment advice. Figures are illustrative.