7th Pay Commission gives sleepless nights to RBI MPC members over CPI inflation target

Since the time 7th Pay Commission has been approved by Union Cabinet the indicator, which is supposed to bring good days to many central government employees has been giving sleepless nights to the Reserve Bank of India, especially while deciding on CPI inflation! All eyes are currently watching RBI, which will be announcing India’s second bi-monthly monetary policy for fiscal year FY19. RBI is an inflation trajectory ruled central bank, and every decision on policy repo rate usually surrounds it. RBI has been very firm on how 7th Pay Commission continues to put pressure on inflation. 

Indiaan Consumer Price Index (CPI), after relaxing for two consecutive months, once again inched upward to 4.58% in April 2018 compared to 4.28% in March, 4.44% in February, and is moving towards 5.07% mark recorded in January 2018. 

RBI in last policy revised it’s CPI inflation target to 4.7 - 5.1% in H1FY19 and 4.4% in H2FY19 including the 7th Pay Commission related HRA impact for central government employees, with risks tilted to the upside.

In previous policy, RBI said, “The statistical impact of an increase in HRA for central government employees under the 7th CPC will continue till mid-2018, and gradually dissipate thereafter.” 

RBI even highlighted that if the impact of HRA revisions were excluded, the CPI inflation would have been projected at 4.4-4.7 per cent in H1:2018-19 and 4.4 per cent in H2.

Currently, CPI inflation is seen to rise due to higher crude price, rupee weakening, MSP hikes and 7th Pay Commission.

For 7th pay commission, Anjali Verma analysts at Phillip Capital said, “One of the reasons for likely inflation rise in the coming months is a soft base (a year ago) and the 7th PC HRA impact, which RBI has stated should be ‘looked through’. This is also the reason for higher core CPI at 6%.”

On the other hand, analysts at Kotak Institutional Equities said, “ Amid narrowing output gap, rising input costs will likely be passed on to consumers. Even after excluding the HRA impact the direction of core inflation does not materially change.”

In June last year, the Cabinet recommended revision of 7th CPC HRA when Dearness Allowance reaches 50% and 100% - the government has decided to revise rates when DA crosses 25% and 50% respectively. 

The 7th Pay Commission had recommended HRA too be fixed at 24%, 16% and 8% depending on the cities employees work in. But, central government employees demanded 30%, 24% and 16% HRA.