Mumbai: The Reserve Bank of India (RBI) on Tuesday said the implementation of the 7th Central Pay Commission (CPC) awards would have a significant bearing on the inflation trajectory through both direct and indirect channels. In its monetary policy statement on Tuesday it said 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 boost GDP by around 40 basis points. RBI added that the impact of the pay awards is likely to be seen over a period of two years.
However, at RBI governor Raghuram Rajan’s media briefing after the policy announcement, Urjit R Patel, deputy governor, RBI said that these are just a projections essentially on account of adjustments to HRA that will take place both at the centre and state levels and the RBI would revise these projections as more details emerge. “The thing to notice is that most probably the impact of the seventh pay commission award on headline inflation would be considerably less than the previous pay commissions as the outgo of arrears would be substantially lower,” he added.
While the direct effect on inflation would come through a higher housing index, RBI said 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. RBI is focussed on bringing down retail inflation to its target of 5 per cent by March 2017 and 4 per cent by March 2018.
