7th Pay Commission Latest News – RBI again warns of inflation on 7th CPC implementation

The stubborn underlying inflation momentum is unlikely to be
helped by the 7th Pay Commission award and the effects of
the one-rank-one-pension (OROP) award, the Reserve Bank
of India (RBI) said during is monetary policy review meet.
RBI’s earlier observation on 7th Pay Commission
implementation: 7th Pay Commission – Implementation
may Lead to Inflation – RBI
The Reserve Bank of India has warned that the
implementation of the 7th Central Pay Commission and the
impact of one-rank-one-pension (OROP) award could lead to
a major increase in Consumer Price Index (CPI) inflation. The
RBI said that the 7th CPC itself could lead to a nearly 190
basis points increase in CPI inflation.
“The stubborn underlying inflation momentum is unlikely to
be helped by the 7th Pay Commission award and the effects
of the one-rank-one-pension (OROP) award,” the RBI has
said in its Monetary Policy Report released on Tuesday along
with the Credit Policy.
CPI inflation stood at 5.2 per cent in February 2016. Going
forward, CPI inflation is expected to decelerate modestly
and remain around 5 per cent during 2016-17 with small
inter-quarter variations, according to RBI.
“The implementation of the 7th Central Pay Commission
(CPC) awards can have a significant bearing on the inflation
trajectory through both direct and indirect channels. The
direct impact of the 7th CPC recommendations on headline
inflation is expected to be around 150 basis points. The
indirect effects are estimated to be around 40 basis points,”
the Monetary Policy Report released by RBI has said.
The report said that the impact of the implementation of the
report is expected to persist for around 2 years. “Assuming
that the Government implements the Commission’s
recommendations by the second quarter of 2016-17, CPI
inflation could be, on average, 100-150 bps higher than the
baseline in 2016-17 and 2017-18,” the RBI has said. However,
it said that the Government’s decision on implementation of
the 7th CPC is awaited.
Giving the rationale, RBI said that in case of subsidised
housing provided by the Government, rent charged for the
dwelling is the house rent allowance (HRA) normally
admissible to the employee along with a nominal license fee.
An increase in HRA leads to an increase in imputed rent for
Government provided accommodation. Such HRA awards, by
their construct, seek to bring parity of housing allowances by
the Government with the prevailing market rates.
“Thus, the direct effect on inflation comes through a higher
housing index. The indirect effects stem from an increase in
private consumption expenditures and through second-round
increases in rental rates for housing in general which could
embed higher inflation expectations in the public’s
perception.” the RBI has said.
HRA rates would automatically increase when the dearness
allowance of the employees crosses threshold levels.
Source : The Financial Express