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7th Pay Commission: Evolving momentum of inflation to be determined by implementation of HRA, says RBI

New Delhi: The Reserve Bank of India in its second bi-monthly monetary policy review on Wednesday projected the quarterly average headline inflation in the range of 2.0-3.5 percent in the first half of the year and 3.5-4.5 percent in the second half.

RBI has slashed benchmark lending rate by 0.25 percent to 6 percent citing reduction in upside risk to inflation, a move that will lower EMIs for home, auto and personal loans.

This is the first rate cut since October 2016 and the interest rate is now at 6-year low.

Looking ahead, RBI said, as base effects fade, the evolving momentum of inflation would be determined by:

(a) the impact on the CPI of the implementation of house rent allowances (HRA) under the 7th central pay commission (CPC)

(b) the impact of the price revisions withheld ahead of the GST

(c) the disentangling of the structural and transitory factors shaping food inflation.

“The inflation trajectory has been updated taking into account all these factors and incorporates the first round impact of the implementation of the HRA award by the Centre,” RBI said.

There are several factors contributing to uncertainty around this baseline inflation trajectory.

The Central Bank further said that the timing of the States’ implementation of the salary and allowances award is critical – it is not factored into the baseline projection in view of lack of information on their plans.

“If States choose to implement salary and allowance increases similar to the Centre in the current financial year, headline inflation could rise by an additional estimated 100 basis points above the baseline over 18-24 months,” it said.

In line with record low retail inflation, the RBI Governor headed Monetary Policy Committee (MPC) cut policy repo rate by 25 basis points to 6 percent and the reverse repo by similar proportion to 5.75 percent.

The MPC has also decided to keep the policy stance neutral and to watch incoming data with a view to keeping headline inflation close to 4 percent.

Source

Published On : 02-Aug-2017

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