What is a good inflation rate to use for retirement planning in india?
Answers
For retirement planning, one should adopt a very conservative approach. You should assume expected rate of return on lower side & inflation on a higher side. This should be done in order to protect yourself against adverse economic situations.
Now taking your case, rate of inflation depends on how far your retirement is. Now let me explain the logic behind it. The rate of inflation & growth rate of an economy goes hand in hand. If an economy grows at a higher rate (like India), it’ll have higher inflation (India’s CPI is around 5–6%). However, as the economy grows in size, its growth rate as well as inflation reduces because of base effect. America’s economy is stagnant & so is its inflation. As per CLSA, India’s average inflation since 1990 works out to 6.4%. In medium term (10–12 years), the inflation rate is expected to be around this level since we will be experiencing good growth in coming times. However, as our economy grows, our growth rate will decelerate & so would our inflation rate.
Finally coming to your question, if your retirement is due in 10 – 12 years time, then you can assume inflation rate of 7% (you can assume 8%, if you want to be very conservative). If your retirement is beyond that period, you can assume inflation rate of 6% (& 7% conservatively) for planning your retirement. I would recommend not to go below 6% to play it safe.
Hope this helps.