Inflation is the rate at which prices rise over time. If a 1kg packet of tomatoes cost ₹40 last year and costs ₹48 today, tomato inflation is 20%. When inflation rises across the economy — food, fuel, rent, services — each rupee you earn buys less. This is why controlling inflation is considered one of the most important jobs of any central bank.
How Inflation Is Measured in India
CPI vs WPI — India's Two Inflation Measures
Why the RBI Raises Rates — The Mechanism
How a Rate Hike Brings Inflation Down
RBI raises the repo rate
The repo rate is the rate at which RBI lends to banks overnight. Higher repo = more expensive for banks to borrow.
Banks raise their lending rates
Home loans, car loans, business loans get more expensive. Banks also raise FD rates to attract deposits.
People borrow and spend less
Expensive loans mean fewer people take out loans for homes, cars, or business expansion.
Businesses slow expansion, demand falls
With consumers spending less, companies can no longer raise prices as easily. They may even cut prices to sell inventory.
Inflation cools
Reduced demand pulls prices down toward the RBI's 4% target. The cycle can take 6–18 months to fully work through.
Higher rates slow business investment and can increase unemployment. The RBI has to balance — act too aggressively and you push the economy into recession. Act too slowly and inflation spirals. This trade-off is called the 'dual mandate' problem, though India's mandate is inflation-focused (4%).
4%
RBI inflation target (CPI)
6%
Upper tolerance limit
6.5%
Current repo rate (May 2026)
4.9%
CPI inflation (Apr 2026)
India's RBI targets which measure of inflation, and what is the official target rate?
Arjun Menon
Economy Reporter