Relevance for UPSC: GS-III (Indian Economy – Inflation & Monetary Policy)
Source: The Hindu ; RBI Monetary Policy Committee Minutes

Context

The Reserve Bank of India’s Monetary Policy Committee has expressed concern over persistently low inflation, after Consumer Price Index inflation declined to about 0.3% (October 2025). This is below the lower bound of India’s inflation target, signalling underlying weakness in the economy.

Why Very Low Inflation Is Problematic

• Signals weak demand: When prices rise very slowly, it often reflects insufficient consumer demand, discouraging firms from expanding production.
• Raises real interest rates: With very low inflation, the real cost of borrowing increases, even if nominal interest rates remain unchanged.
• Increases real debt burden: Loans become harder to repay in real terms, affecting businesses, farmers and small enterprises.
• Discourages investment: Low expected price growth reduces future profit expectations, leading firms to postpone investment decisions.
• Risk of deflation: Prolonged disinflation can turn into deflation, where falling prices further suppress spending and growth.

Policy Implications

• Justifies an accommodative monetary policy to revive demand.
• Calls for fiscal support and public investment to complement monetary easing.
• Emphasises that price stability means inflation close to the target, not near zero.

For a developing economy like India, very low inflation can weaken growth, employment and investment, making it as concerning as high inflation.

Q. With reference to very low inflation, consider the following statements:

1. It can raise real interest rates in the economy.
2. It necessarily reflects strong economic growth.
3. It can discourage private investment.

Which of the statements given above are correct?
A. 1 and 3 only
B. 2 and 3 only
C. 1 only
D. 1, 2 and 3