India's inflation scenario has taken a dramatic turn with consumer prices barely rising, sparking intense debate among economists and policymakers about whether this represents a problem or progress for the world's fastest-growing major economy.
The Current Inflation Landscape
Recent data reveals that India's retail price index remained virtually flat in October, registering a mere 0.25% increase compared to the same month last year. This development comes approximately a decade after the Reserve Bank of India received an explicit inflation targeting mandate, with the central bank currently projecting inflation at 2.6% for fiscal year 2025-26.
The RBI maintains its inflation target at 4%, allowing a flexibility band of 2 percentage points in either direction. While the central bank forecasts inflation reaching 4% by the quarter ending March 31, 2026, and 4.5% in the subsequent three months, the current ultra-low readings have generated mixed reactions across economic sectors.
Who Bears the Brunt of Low Inflation?
Businesses across India are feeling the pinch of static prices, which significantly reduces their pricing power. When companies cannot adjust prices upward, they face compressed revenue growth and must resort to aggressive cost-cutting measures to protect profit margins. This scenario often results in flatter financial performance graphs that concern investors and stakeholders alike.
The government confronts its own set of challenges with weak nominal growth translating to slower tax revenue increases. This revenue constraint forces more careful fiscal management and potentially limits public spending to maintain deficit targets. Additionally, the Centre loses the subtle benefit that inflation provides in reducing the real burden of public debt over time.
For individual borrowers, including those with home loans and personal debt, stable prices eliminate the hidden advantage that inflation typically provides by gradually eroding the real value of their repayment obligations. Unless loans are repriced at lower interest rates, debtors face the full burden of their original borrowing commitments.
The Broader Economic Benefits of Price Stability
Despite these challenges, price stability delivers significant advantages to the broader economy that extend well beyond protecting household savings and helping low-income families manage their budgets more effectively.
The assurance that the rupee's purchasing power will decline at a predictable, modest rate creates two crucial economic benefits. First, it reduces the overall cost of capital across the economy by minimizing the risk premium that creditors would otherwise demand to compensate for unpredictable inflation erosion.
Second, and perhaps more importantly, stable inflation enables long-range investment planning in local currency terms. Investors can make more reliable forecasts about future costs and returns, encouraging capital allocation to productive enterprises rather than inflation-hedging strategies.
There is growing evidence that the RBI's inflation targeting framework has played out favorably for India's economic fundamentals, creating a more predictable environment that supports sustainable growth.
Navigating the Path Forward
For price stability to deliver its full economic promise, policymakers must ensure its endurance over the long term. The current dip below RBI's target band doesn't necessarily signal alarm, provided the threat of deflation—which can trigger a severe economic crisis—remains contained.
Economists argue that unless deflation risks become credible, authorities should resist pressure to artificially stimulate prices upward. While some debtors and revenue-dependent entities may express concern, maintaining discipline helps the economy overcome what experts call the 'money illusion'—the tendency to focus on nominal rupee figures rather than real purchasing power.
The ultimate economic justice lies in ensuring that people don't fall victim to this illusion by keeping the gap between real and nominal economic indicators tightly controlled. As India continues its economic ascent, the low inflation environment, while challenging for specific sectors, may well represent a necessary phase in building a more stable and resilient economic foundation for future generations.
