7th pay commission: RBI says revised HRA may impact inflation, here's what it means for pay hike hopes

Pay hike hopes of around 50 lakh central government employees might get shattered in wake of the latest Reserve Bank of India (RBI)'s report. Various media reports are already doing the round that the Prime Minister in his August 15 speech might announce the hike in salaries beyond recommendations of the seventh pay commission. However, it should be noted that the government in the past had denied any such move. 

Earlier, the Minister of State for Finance P. Radhakrishnan in Lok Sabha had said that the Narendra Modi's government is not planning to give any hike in minimum basic salary beyond the recommendations of the seventh pay commission. 

Currently, the Central government employees are getting basic pay according to the fitment formula of 2.57 of the basic pay and if this big step is taken, it will come as a massive news for the Central government employees. Fitment factor is a figure used by 7th CPC with which the basic pay in 6th CPC regime (i.e Pay in Pay band + Grade pay) is multiplied in order to fix basic pay in revised pay structure (i.e 7th CPC). Fitment factor formulated by 7th CPC is 2.57.

The employees are worried that pay hike might become a far fetched dream as the RBI has raised inflation concern over revised House Rent allowance (HRA) and experts feel that pay hike might not come, keeping in mind the rising inflation and RBI's observations. 

RBI on Wednesday decided to increase the policy repo rate by 25 basis points to 6.5%. The reverse repo rate has been hiked to 6.25%, the RBI announced after its three-day Monetary Policy Committee (MPC) meeting.

"RBI's Monetary Policy Committee has decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5% Consequently, the reverse repo rate under the LAF stands adjusted to 6.25% and marginal standing facility rate and Bank Rate to 6.75%," the apex bank said in a statement. 

RBI in its eport mentioned that inflation rates have increased on account of implementation of 7th Pay Commission. The revised HRA structure came into place in July 2017 under the 7th Pay Commission.

RBI stated in its third bi-monthly Monetary Policy, “In the second bi-monthly resolution of 2018-19, CPI inflation for 2018-19 was projected at 4.8-4.9 per cent in H1 and 4.7 per cent in H2, including the HRA impact for central government employees, with risks tilted to the upside. Excluding the impact of HRA revisions, CPI inflation was projected at 4.6 per cent in H1 and 4.7 per cent in H2.”

It further added, “Finally, the staggered impact of HRA revision by state governments may push headline inflation up. While the statistical impact of HRA revisions will be looked through, there is a need to watch out for any second-round impact on inflation.”

“Retail inflation, measured by the year-on-year change in the CPI, rose from 4.9 per cent in May to 5 per cent in June, driven by an uptick in inflation in fuel and in items other than food and fuel even as food inflation remained muted due to lower than usual seasonal uptick in prices of fruits and vegetables in summer months. Adjusting for the estimated impact of the 7th central pay commission’s house rent allowances (HRA), headline inflation increased from 4.5 per cent in May to 4.6 per cent in June. Low inflation continued in cereals, meat, milk, oil, spices and non-alcoholic beverages, and pulses and sugar prices remained in deflation," RBI said.