What is Inflation (Mehengai)? A Guide to Protecting Your Savings in India

Ever get that feeling when you buy your monthly groceries that your money just doesn’t stretch as far as it used to? That the same ₹1,000 note that bought a full basket of goods last year now buys a little less? That, my friend, is inflation, or as we commonly call it in India, Mehengai.

It’s a silent financial termite, slowly eating away at the value of your hard-earned savings. While it might seem like a small change, over time, its impact can be huge, affecting everything from your daily budget to your long-term dreams like buying a house or retiring comfortably.

But don’t worry. Understanding inflation is the first step to fighting it. In this post, we’ll break down what inflation is, how it impacts your money, and most importantly, what you can do to protect and even grow your wealth despite it.

Key Takeaways:

• Inflation reduces purchasing power: The same amount of money buys you fewer goods and services over time.
• Saving isn’t enough: Money in a low-interest savings account often loses value in real terms because the interest earned is less than the inflation rate.
• Investing is crucial: To beat inflation, your money needs to grow faster than the rate of inflation. Assets like equities, real estate, and gold can help you achieve this.

What is Inflation (Mehengai)? A Simple Explanation

At its core, inflation is the rate at which the general level of prices for goods and services rises, and consequently, the purchasing power of currency falls.

Think about it with these everyday examples:

• Petrol Prices: Remember when petrol was under ₹90 a litre? Today, it’s often well over ₹100 in many cities. That’s inflation in action.
• Dal/Pulses: The price of your favourite dal fluctuates, but the long-term trend is upwards. A kilo of Toor dal that cost around ₹110 a few years ago might now be closer to ₹170.
• Movie Tickets: A trip to the cinema that cost ₹200 a few years back can now easily set you back ₹350 or more for the same experience.

Inflation isn’t just one price going up; it’s the average increase across a wide range of goods and services. In India, this is officially measured by the National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI), using the Consumer Price Index (CPI).

The Silent Thief: How Inflation Erodes Your Savings

Here’s where inflation gets personal. Let’s say you have ₹1,00,000 saved. You feel secure, but what if that money is in a savings account earning 3.5% annual interest, while the average inflation rate for the year is 5.5%?

This is where the concept of “Real Return” is critical. It’s the actual return you get after accounting for inflation.

The Formula: Real Return = Nominal Return (Your Investment’s Return) - Inflation Rate

In our example:

• Nominal Return = 3.5% (from your savings account)
• Inflation Rate = 5.5%
• Real Return = 3.5% - 5.5% = -2%

This means that even though your bank balance shows ₹1,03,500 at the end of the year, the actual purchasing power of your money has decreased by 2%. You’re running on a financial treadmill but going backwards.

How to Calculate Your Personal Inflation Rate

The official CPI is an average. Your personal inflation rate might be different based on your unique spending habits. If you spend a lot on education and healthcare, where prices might be rising faster than average, your personal inflation rate will be higher.

Here’s a simple way to estimate it:

1. Track Your Expenses: Note down your total monthly expenses for a specific month (e.g., January 2024).
2. Compare Over Time: A year later, track your total expenses for the same month (January 2025) for the same lifestyle.
3. Calculate the Difference: Use this formula: Personal Inflation Rate (%) = [(New Expenses – Old Expenses) / Old Expenses] x 100

Example:

• Expenses in Jan 2024 = ₹50,000
• Expenses in Jan 2025 = ₹54,500
• Personal Inflation Rate = [(54,500 - 50,000) / 50,000] x 100 = 9%

This simple calculation can be a real eye-opener!

Beating Inflation: Where to Invest Your Money

If saving isn’t enough, what’s the solution? Investing. The goal is to put your money into assets that have the potential to generate returns higher than the rate of inflation. Here are some popular options in India:

1. Equities (Stock Market): Investing in stocks or equity mutual funds means you own a part of a business. As good companies grow their profits, the value of their shares tends to rise. Over the long term, equities have historically delivered returns that significantly outperform inflation. While they come with short-term volatility, a well-diversified portfolio, often built through Systematic Investment Plans (SIPs), is one of the most effective ways to build wealth.

2. Real Estate: Property values and rental incomes generally rise with inflation. Owning real estate can be a good hedge, but it requires a large initial investment and is not easily convertible to cash (it’s an illiquid asset).

3. Gold: Gold is often seen as a “safe haven” during uncertain times. Its value tends to hold steady or increase when the purchasing power of currency falls. While it may not generate the high growth of equities, it’s a good tool for diversification. Modern options like Sovereign Gold Bonds (SGBs) or Gold ETFs make investing in gold easier than ever.

4. Inflation-Indexed Bonds (IIBs): These are bonds issued by the government where the principal and interest payments are adjusted for inflation, specifically designed to protect your investment’s value from erosion.

The Role of the RBI in Controlling Inflation

The Reserve Bank of India (RBI) plays a crucial role in keeping inflation in check. Its primary goal is to maintain price stability, which is essential for sustainable economic growth. The RBI has a mandate to keep CPI inflation within a target band of 2% to 6%.

How does it do this? The main tool is the Repo Rate.

• Repo Rate: This is the interest rate at which the RBI lends money to commercial banks. As of mid-2025, the repo rate is 5.50%.
• When inflation is high: The RBI increases the repo rate. This makes borrowing more expensive for banks, who in turn increase loan rates for consumers and businesses. This discourages spending, reduces the money supply, and helps cool down prices.
• When inflation is low: The RBI may cut the repo rate to make borrowing cheaper, encouraging spending and boosting economic activity.

Other tools include the Cash Reserve Ratio (CRR) and Open Market Operations (OMOs), all aimed at managing liquidity in the economy.

Inflation is a fundamental economic reality that no one can escape. Ignoring it means letting your financial future slip through your fingers. By understanding how it works and taking proactive steps to invest your money wisely, you can turn this challenge into an opportunity. You can make mehengai work for you, not against you, ensuring your savings not only survive but thrive over the long term.

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This article is for informational purposes only and is not investment advice. Please conduct your own research before investing.