RBI once again flags 7th Pay Commission implementation as inflation risk

The Reserve Bank of India (RBI) has once again outlined the implementation of 7th Pay Commission as aiding to India's inflation. 

RBI said, "At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission’s award are upside risks. The date of implementation of the latter is still not announced and as such, it is not factored into the baseline projections."

Although, on inflation, RBI said, "The abrupt and significant retreat of inflation in April from the firming trajectory that was developing in February and March has raised several issues that have to be factored into the inflation projections."

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This is not the first time RBI has raised concern regarding 7th Pay Commission impact on inflation. 

In the last monetary policy, on April 6, RBI Governor Urjit Patel had warned saying that in case the increase in house rent allowance as recommended by the 7th CPC is awarded, it will push up the baseline trajectory by an estimated 100-150 basis points over a period of 12-18 months, with this initial statistical impact on the CPI followed up by second-order effects.

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This time, RBI said that the abrupt and significant retreat of inflation in April from the firming trajectory that was developing in February and March has raised several issues that have to be factored into the inflation projections. 

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If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5 % in the first half of the year and 3.5-4.5 % in the second half, RBI said.

RBI said, "Noting that inflation has fallen below 4% only since November 2016, the MPC remains focused on its commitment to keeping headline inflation close to 4% on a durable basis keeping in mind the output gap."