Apr 5, 2016

RBI ASSUMES 7TH CPC IMPLEMENTATION BY THE SECOND QUARTER OF 2016-17; CPI MAY RISE 150 BPS IN TWO YEARS

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.

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