Pay panel proposals to fuel inflation: RBI - News by Asian Age RBI on wait and watch mode on 7th

Pay Commission - News by Financial Express

What Raghuram Rajan Said on Seventh Pay Commission - News by NDTV

Pay panel proposals to fuel inflation: RBI

While stating that a fall in global crude oil prices and a normal monsoon could help contain inflation around five per cent by the end of FY17, RBI maintained that the implementation of the Seventh Pay Commi-ssion recommendation could put an upward pressure on inflation for a period of one to two years.

“Since September 2015 onwards, we have some information on pay commission awards and we have to see how it is implemented and who implements it and their timings. RBI will adjust the forecast path as and when more clarity emerges on the timing of implementation,” said RBI governor Raghuram Rajan.



While awaiting further data on the development of inflation, he said that RBI would be looking for structural reforms in the forthcoming Union Budget that could boost growth.
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RBI on wait and watch mode on 7th Pay Commission

The RBI is in ‘wait n watch’ mode as to what government does in the Union Budget and what big states are doing with their own state pay commissions

RBI Governor Raghuram Rajan on Tuesday announced its monetary policy review and left the key policy rate unchanged. However, it indicated at a accommodative stance on inflation and further rate cut. Rajan said with “inflation moving closer to the target” there would be more room for rate cut to support growth.

However, the RBI also mentioned about Seventh Central Pay Commission risks to the fiscal deficit, which was not factored in the central bank’s inflation trajectory. Therefore, the RBI is in ‘wait n watch’ mode as to what government does in the Union Budget and what big states are doing with their own state pay commissions (Punjab, UP, WB, Kerala and Tamil Nadu – all election bound – and HP have already announced setting up of their respective Pay Commissions, and likely to be followed by the remaining).

“Inflation has evolved closely along the trajectory set by the monetary policy stance. With unfavourable base effects on the ebb and benign prices of fruits and vegetables and crude oil, the January 2016 target of 6 per cent should be met,” Rajan said but added a caveat on the impact of the seventh pay commission implementation on the price index.

“Going forward, under the assumption of a normal monsoon and the current level of international crude oil prices and exchange rates, inflation is expected to be inertial and be around 5 per cent by the end of fiscal 2017, ” RBI said.

“However, the implementation of the Seventh 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 Reserve Bank will adjust the forecast path as and when more clarity emerges on the timing of implementation,” Rajan said.

“As per our estimate, the Pay Commission implementation by the Centre and state governments would lead to a $50 bn fiscal stimulus over the next two years. The downside risks emanate from softer global commodity prices and a normal monsoon. However, the RBI would like to wait and watch as these factors play out over the next few months before being in a position to recalibrate the glide path of inflation and respond accordingly. We believe that the upside risks are marginally higher than the downside risks as of now, and hence we do not see any policy rate cuts in FY17,” said Jay Shankar, chief India economist & director, Religare Capital Markets.

Read at: Financial Express

What Raghuram Rajan Said on Seventh Pay Commission

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.
Read at: NDTV