The Argument That Low Inflation Is beneficial Is Supported By Several Economic Principles And Observed Data.....

 Low and stable inflation in India is indeed a desirable economic condition and a key objective of the Reserve Bank of India's (RBI) monetary policy, contrary to the idea that low inflation is inherently a problem. The RBI has an official target of 4% CPI inflation with a tolerance band of +/- 2%. This approach fosters a stable environment that can lead to enhanced economic outcomes. A moderate, stable, and predictable inflation rate is widely considered beneficial for an economy. It strikes a balance between encouraging current economic activity and preserving the value of money over time. In India, maintaining low inflation is a primary mandate for the RBI, as it underpins macroeconomic stability, fosters investor confidence, and supports sustainable growth. The belief that "low prices mean high demand and supply" reflects the potential stimulus that price stability offers to various economic actors.

Explanation: The Benefits of Low and Stable Inflation

The argument that low inflation is beneficial is supported by several economic principles and observed data:

Boosts Consumer Spending and Investment: Low and stable inflation increases real wages and disposable incomes, allowing consumers to purchase more goods and services. This stability also reduces uncertainty for investors, encouraging long-term investments in productive assets, which is crucial for job creation and income growth.

Enhances Saving: Predictable prices help preserve the real value of after-tax incomes and savings, encouraging individuals and households to save, which in turn provides a stable source of funds for investment in the economy.

Improves International Competitiveness: With the currency depreciating due to external factors, maintaining low domestic inflation boosts the competitiveness of Indian exports in the global market. This can offset the pressure from tariffs and external headwinds, increasing demand for domestically produced goods and services, which is beneficial for the supply side of the economy.

Lowers Borrowing Costs: Low and stable inflation typically leads to lower long-term nominal interest rates. This makes borrowing cheaper for businesses (especially in credit-reliant sectors like infrastructure and MSMEs) and individuals (e.g., for housing), stimulating both demand and supply sides of the economy.

Anchors Expectations and Guides Policy: A key aspect of the RBI's inflation-targeting framework (4% +/- 2%) is to anchor inflation expectations. This transparency helps households and firms make more informed decisions about consumption, saving, and investment, making monetary policy transmission more effective.

Prevents Deflationary Spirals: While high inflation is harmful, deflation (falling prices) is considered an economic problem because consumers delay purchases in anticipation of even lower prices, which can stall economic activity and lead to a recession. A low, positive inflation target prevents this scenario.

Data from an RBI study (April-June 2025) indicated that while private companies' sales grew moderately (5.5%), their net profits surged significantly (17.6%), aided by lower global commodity prices. This suggests that low input costs contributed to robust margins. However, corporate investment (capex) remained weak, indicating that businesses were not investing these profits, potentially due to subdued overall demand or high real interest rates stemming from persistent inflation expectations despite actual low inflation data. A potential rate cut could address this by lowering the perceived cost of capital and encouraging investment, aligning market sentiment with the actual low inflation environment. Low inflation, when resulting from oversupply or increased productivity, is a positive indicator for India's economic health, promoting higher spending, saving, and investment. It helps manage the challenges posed by currency depreciation and global tariff pressures by enhancing competitiveness. While the risk lies in low inflation being a symptom of weak demand, the correct monetary policy response, such as a well-signaled rate cut, can reinforce low and stable inflation and act as a necessary stimulus for both supply and demand. The goal is price stability, which provides a solid foundation for sustainable and inclusive economic growth.