International rating agency Moody’s Investors Service in its latest report has said that food price inflation will remain moderate in the near term aided by larger than average monsoon rainfall and contributing to keeping headline inflation within or close to target this year, but implementation of the 7th Pay Commission award could stoke prices.
Moody’s said that there is upside risks related to the implications of the rise in public sector wages with the implementation of some of the Pay Commission’s recommendations. However, the less accommodative monetary policy stance at present than in 2009-13, when the RBI’s policy interest rates were well below inflation, mitigates these risks. Further it said higher wages boost consumption significantly, but inflationary pressures could rise. When the full 7th Pay panel recommendations are implemented, further inflationary pressure could arise as a consequence of the increase in housing allowances.
The government has notified 2.57 time hike in basic salary of 1 crore government employees and pensioners as per the 7th Pay Commission recommendations, consequently the pay hike has been made effective from January 1, 2016. The RBI in its bi-monthly monetary policy too had said it expects some upside risk to 5 per cent inflation target by March 2017 mainly on account of the 7th Pay Commission award and maintained status quo on key rates, citing upside risks to the Reserve Bank’s inflation target.
