7th pay commission – Implementation may Lead to Inflation – Dr Rajan said that the RBI will “adjust the forecast path as and when more clarity emerges on the timing of (pay commission) implementation”.
Reserve Bank Governor Raghuram Rajan on Tuesday kept the policy rate on hold at 6.75 per cent, as widely expected, opting to wait until after the Union Budget to decide on whether to cut interest rates further.
In the policy statement, Dr Rajan also said that the central bank is closely watching the implementation of the Seventh Pay Commission, particularly for its inflation guidance. The RBI expects inflation to be around 5 per cent by the end of fiscal 2016-17.
“However, the implementation of the VII Central Pay Commission award, which has not been factored into these projections, will impart upward momentum to this trajectory for a period of one to two years,” the RBI chief said in the policy statement.
Dr Rajan said that the RBI will “adjust the forecast path as and when more clarity emerges on the timing of (pay commission) implementation”.
The Seventh Pay Commission has recommended a 23.6 per cent hike for government employees and if the proposals are accepted, the central government has to bear an additional burden of over Rs. 1 lakh crore each year.
In this context, the forthcoming Union Budget for 2016-17 assumes significance. Analysts are closely watching the fiscal deficit target Finance Minister Arun Jaitley will set for the year, in view of the implementation of seventh pay panel’s recommendations and the need for higher government spending to revive the economy.
Many economists have said that the Finance Minister should choose growth over the 3.5 per cent fiscal deficit goal.
Having cut the policy repo rate by 125 basis points in 2015, RBI Governor Raghuram Rajan had earlier warned against straying from the path of fiscal consolidation or relaxing the fight against inflation.
Economists have said that Dr Rajan will wait until after the government’s annual Budget at the end February to decide on whether to cut interest rates further.
“Whether the government’s fiscal deficit is adjusted higher and how the pay commission proposals are implemented will be important factors for the RBI to consider,” said Radhika Rao, an economist for DBS Bank.
The RBI’s next policy meet is scheduled for April 5, 2016.