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 said that implementation of HRA will be one of the key factors that will guide the momentum of inflation in future.

RBI 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.

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.

In a bonanza to 48 lakh central government employees, the government had earlier in July notified recommendations of 7th Central Pay Commission with 34 modifications which will impose an additional annual burden of Rs 30,748 crore on the exchequer.

HRA rates, which was earlier paid at 30 percent for X (population of 50 lakh and above), 20 percent for Y (5 to 50 lakh) and 10 percent for Z (below 5 lakh) category cities, have now been reduced to 24 percent for X, 16 percent for Y and 8 percent for Z category cities.

The HRA rates will be revised upwards when the DA crosses 25 percent and 50 percent respectively, as per the notification.

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.

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