RBI sees retail inflation at 5%; govt pay hikes to put pressure

New Delhi: The Reserve Bank on Tuesday projected retail inflation to be around 5 percent for the current fiscal, saying that the 7th Pay Commission burden could put an upward pressure of up to 1.50 percent over two years.

"Going forward, CPI inflation is expected to decelerate modestly and remain around 5 percent during 2016-17 with small inter-quarter variations," RBI said in its first bi- monthly monetary policy statement for 2016-17.

RBI said there are uncertainties surrounding this inflation path emanating from recent unseasonal rains, the likely spatial and temporal distribution of monsoon, the low reservoir levels by historical averages, and the strength of the recent upturn in commodity prices, especially oil.

"The persistence of inflation in certain services warrants watching, while the implementation of the 7th Central Pay Commission awards will impart an upside to the baseline through direct and indirect effects," RBI said.

The central bank said it expects the implementation to hurt inflation by 1-1.5 percent over a two year period, but added that the shock will not be as strong as that felt during the implementation of the 6th pay panel suggestions.

The government has already said it has made provisions for the additional liabilities towards implementation of the Seventh Pay Commission due from January 1, 2016 as well as One Rank One Pension scheme for Defence services.

Implementation of the pay commission report is to cost the government Rs 1.02 lakh crore.

RBI said there will be some offsetting downside pressures from tepid demand in the global economy, effective supply side measures by government keeping a check on food prices, and commendable commitment to fiscal consolidation.