7th Pay Commission Allowances – RBI publishes Monetary Policy Report analyses the possible inflation in CPI consequent on implementation of 7th CPC’s recommendations on HRA
Reserve Bank of India has published the Monetary Policy Report recently. While touching various factors that would be responsible for inflationary trend in short term, RBI is concerned about possible Consumer Price Index Inflation on account of revision of House Rent Allowance when Govt implements 7th Pay Commission recommendations. These are extracts from RBI Monitory policy report relevant to 7th Pay Commission report. The entire report is available for reading / download in the link given below.
The 7th Pay Commission recommended an increase in house rent allowance (HRA) of 8-24 per cent of basic pay.
The higher HRA would have a direct and immediate impact on headline CPI through an increase in housing inflation.
Assuming a rate of increase in the HRA as proposed by the 7th CPC is implemented from early 2017-18 onwards and the State Governments implement a similar order of increase with a lag of one quarter,CPI inflation could be 100-150 bps higher than the baseline for 2017-18.
The HRA impact on inflation is expected to persist for 6-8 quarters, with the peak effect occurring around 3-4 quarters from implementation. In addition, indirect effects could occur from elevated inflation expectations.