Is very low inflation a problem? Not if we take a wide-angle view of the Indian economy

This question has been raked up by India’s retail price index; it was flat in October, with the general level of prices up merely 0.25% over the same month last year. About a decade after the Reserve Bank of India (RBI) was given an explicit inflation target of 4% (with leeway of 2 percentage points up or down), its forecast for fiscal 2025-26 is 2.6%.

Although RBI projects inflation at 4% in the quarter till 31 March 2026 and at 4.5% in the three months thereafter, not everyone is pleased by the super-low readings we have seen lately. After all, static prices deprive businesses of pricing power. In such a scenario, it is harder to make price-revision gains in revenue, forcing cost compression to defend profits and financial graphs to look flatter.

Similarly, the government must contend with weaker nominal growth in its tax inflows and moderate its outlays accordingly to keep its fiscal deficit in check. If weak prices take hold and settle in for the foreseeable future, it would also mean that the Centre cannot count on inflation to ease its debt burden.

High inflation favours borrowers, as it slowly reduces the real value of what must be paid back. Under stable prices, in contrast, that relief vanishes. Unless loans are repriced at lower rates, this applies to all debtors, including private firms and people with home loans to pay off.

In general, thus, flat prices are bad for the indebted. Yet, what serves the interests of a few badly must never be confused with what does everyone else a disservice—by holding the economy back.

By this reckoner, price stability is highly valuable. That it shields our savings and relieves the hard-up of their struggle to make ends meet is only the most obvious broad benefit.

There is also a big economic advantage in holding price levels steady. The assurance that the internal value—or purchasing power—of the rupee will decline at a foreseeably modest rate (of inflation) grants us two enduring benefits.

First, by curbing the risk of creditors getting back less than they bargained for, it allows the overall cost of capital across the economy to descend. Second, it enables long-range investment plans in the local currency, thanks to relatively reliable forecasts of the rupee’s future value.

This is where the ‘stable’ part of the low inflation deal kicks in; it eases the math that investors must do. These plus points are not just theoretical. There is evidence of RBI’s inflation mandate playing out well for India’s economy.

For price stability to fulfil its big-picture promise, it needs to endure. To that end, inflation dipping below RBI’s target band is not a problem so long as the threat of deflation—which can spell a crisis—is kept at bay. Unless such a risk credibly arises, policymakers must resist calls to inflate the economy.

While some debtors and revenue seekers may fret, it would be best if we rid our economy of the ‘money illusion’ once and for all. Rapidly enlarging rupee figures, be it for pay packets or revenues, may look good on paper, but they are not real unless we account for the value lost to inflation.

As the money illusion is not easy for everyone to see through, justice demands that we do not let people fall victim to it. For this, we must keep the gap between real and nominal figures tight.