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    RBI raises inflation outlook, cites government pay hike, commodity threat

    Synopsis

    The central bank sees risks emanating from the 7th Pay Commission recommendations, a possible rise in commodity prices and an increase in service sector inflation.

    ET Bureau
    By Gayathri Nayak

    MUMBAI: The spectre of rising prices has returned to haunt the Reserve Bank of India, which raised its inflation projection to about 5% for the year ending March 2017, higher than 4.8% estimated in December.

    The central bank sees risks emanating from the 7th Pay Commission recommendations, a possible rise in commodity prices and an increase in service sector inflation.

    While the RBI’s goal of 6% inflation for January is likely to be met and current trends are largely on track to achieve next year’s 5% target, the implementation of the Pay Commission awards and vagaries of the monsoon this year still pose some risks.

    Inflation as measured by the consumer price index rose for the fifth month in December across all constituent categories largely because of base effects, the RBI said. It expects the seasonal decline in prices of fruits and vegetables to temper headline inflation in the near term.

    Retail inflation, excluding food and fuels, rose for the fourth successive month. Excluding petrol and diesel from this category, inflation remained flat. While goods inflation declined, services inflation has been sticky since September, the central bank noted.

    Besides, household inflation expectations remain elevated and the rate of increase in corporate staff costs picked up. On the other hand, rural wage growth has been muted, the RBI said in its fourth bi-monthly policy statement on Tuesday.

    The central bank is looking at more clarity on the impact of the 7th Pay Commission recommendations. “We have to see how it is implemented and who implements it between the Centre and the state governments,” RBI Governor Raghuram Rajan said at a post-policy media conference.

    “There are some aspects of the Pay Commission that we can look through and some we cannot and over time we will be able to give you more information on that.”

    “The RBI’s statement on Tuesday suggests that policy makers, too, are focused on the combination of macroeconomic variables (growth, inflation, fiscal and current account deficits), rather than growth alone,” said Atsi Sheth, associate managing director, Sovereign Risk Group, at Moody’s Investors Service.


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