What is Inflation (Mehengai)? How It Silently Eats Your Savings

Remember when a plate of samosas from your favourite street vendor cost ₹10? Now, you’re likely paying ₹25 or even ₹30 for the same. That, in a nutshell, is inflation. It’s the reason the ₹100 note in your wallet today buys fewer things than it did just a few years ago.

Many of us work hard to save money, carefully putting it away in a savings account. But what if this “safe” money is actually losing its value every single day? This silent financial thief is called inflation, or as we commonly know it, Mehengai.

Key Takeaways:

• Inflation is the rate at which the average price of goods and services increases, reducing the purchasing power of your money.
• Money kept in a low-interest savings account often loses value over time because the interest earned is less than the rate of inflation.
• To grow your wealth, your investments must generate a “real rate of return”—your investment return minus the inflation rate.
• Investing in assets like equities (stocks), real estate, and gold can help you beat inflation over the long term.

What is Inflation, or ‘Mehengai’?

Inflation is the general increase in the prices of goods and services across an economy over time. When the price level rises, each rupee buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power of money.

Think about your monthly grocery bill. A few years ago, you might have filled your cart for ₹3,000. Today, the same basket of items—dal, rice, oil, vegetables—could cost you ₹4,000 or more. The items haven’t changed, but their prices have. This increase is due to inflation.

In India, inflation is officially measured using the Consumer Price Index (CPI), which tracks the average price changes consumers pay for a basket of common goods and services. The official data for May 2025 showed India’s retail inflation rate at 2.82%.

The Silent Thief: Your Savings Account vs. Inflation

You might feel secure seeing the balance in your savings account grow, thanks to the interest credited by the bank. But are you really getting richer? Let’s do the math.

Most major banks in India offer an interest rate of around 2.5% to 3.0% per year on savings accounts. Let’s take an average of 2.7%.

Now, let’s introduce the concept of the Real Rate of Return. This is the actual return on your investment after accounting for inflation.

The Formula: Real Return = Your Investment Return (%) - Inflation Rate (%)

Using the May 2025 inflation rate of 2.82% for our calculation:

• Your Savings Account Return: 2.70%
• Inflation Rate: 2.82%
• Your Real Return: 2.70% - 2.82% = -0.12%

In this realistic scenario, your money is actually losing purchasing power, even though the balance in your account is technically increasing. If inflation were higher, say 5%, your money would lose 2.3% of its value each year (2.7% - 5% = -2.3%). This is how inflation silently erodes your savings.

How to Fight Back: Investments That Can Beat Inflation

If saving isn’t enough, how do you protect and grow your money? The answer is to invest in assets that have the potential to generate returns higher than the inflation rate.

1. Equities (Stock Market): Investing in stocks means owning a part of a company. As companies grow their business and profits (which often increase with inflation), the value of your stock can also grow. Historically, equity indices like the Nifty 50 and Sensex have delivered long-term returns that have comfortably beaten inflation. Investing through a diversified portfolio or equity mutual funds is a powerful strategy.

2. Real Estate: Property has been a traditional favourite for Indian investors. Over the long term, the value of land and property tends to appreciate, often faster than inflation. Additionally, owning a rental property allows you to increase rent periodically to keep pace with rising costs.

3. Gold: Gold is often considered a “safe-haven” asset and a hedge against inflation. When the value of a currency falls, the price of gold often rises. You can invest in physical gold or through more efficient financial instruments like Gold ETFs and Sovereign Gold Bonds (SGBs), which offer tax advantages.

How Inflation Impacts Your Long-Term Goals

Inflation doesn’t just affect your daily expenses; it has a massive impact on your long-term financial goals.

Let’s say you want to save ₹50 lakhs for your child’s college education, which is 15 years away. If we assume an average inflation rate of 5% per year, the actual cost of that same education after 15 years won’t be ₹50 lakhs.

Due to compounding inflation, the future cost would be approximately ₹1.04 crore! If you only plan for ₹50 lakhs, you will fall significantly short. This is why it’s crucial to factor in inflation while planning for all your long-term goals, whether it’s retirement, a child’s wedding, or buying a house.

Who’s the Referee? The Role of the RBI

The Reserve Bank of India (RBI) is the primary body responsible for keeping inflation in check. Its main goal is to maintain price stability, which is essential for sustainable economic growth. The government has mandated the RBI to keep CPI inflation within a target range of 2% to 6%.

The RBI’s most powerful tool to control inflation is the Repo Rate.

• What it is: The repo rate is the interest rate at which the RBI lends money to commercial banks.
• How it works: When inflation is high, the RBI increases the repo rate. This makes borrowing more expensive for banks, who then pass on the higher rates to consumers and businesses via increased loan EMIs. This reduces spending and demand in the economy, helping to cool down prices. As of mid-2025, the RBI has set the repo rate at 5.50% to balance growth and inflation.

By adjusting this key rate, the RBI tries to strike a balance between managing inflation and promoting economic growth.

This article is for informational purposes only and does not constitute investment advice. Please conduct your own research before making any investment decisions.