If a cup of tea cost ₹10 a few years ago and costs ₹12 now, that is inflation: prices in general rising over time. Your ₹100 note is the same note, but it now buys less.
How India measures it
The main measure is the Consumer Price Index (CPI), published every month by the government's statistics office. It tracks the prices of a fixed basket of things households buy, such as food, fuel, housing and clothes. When the basket costs 5% more than a year ago, CPI inflation is 5%.
Your own inflation can differ from the headline number. If your spending is mostly rent and fuel, those prices matter more to you than the average basket.
What interest rates are
Interest is the price of using money. A bank pays you interest on a deposit and charges more interest on a loan; the gap pays for its costs. Rates differ by bank, time period and borrower.
How the two are linked
The Reserve Bank of India (RBI) sets a key rate called the repo rate, the rate at which it lends to banks. When inflation runs high, the RBI may raise it to make borrowing costlier and slow spending. When growth is weak and inflation is calm, it may lower it. The RBI aims to keep CPI inflation around 4%, within a band of 2% to 6%. Banks usually (not instantly, not always) pass changes on to deposit and loan rates.
Real returns
Suppose a deposit pays 7% a year and inflation is 5%. The real return is about 2%: your money grew, and its buying power grew a little. If inflation were 8%, the deposit would grow in rupees but lose buying power. This is why people compare any return with inflation, and why "safe" and "growing" are not the same thing.
Why you see it in market news
Headlines about inflation data or rate decisions move markets because they change what people expect for borrowing costs and company profits. How prices react is never certain.