NEW DELHI: The Reserve Bank today projected retail inflation to be around 5 per cent for the current fiscal, saying that the 7th Pay Commission burden could put an upward pressure of up to 1.50 per cent over two years.
"Going forward, CPI inflation is expected to decelerate modestly and remain around 5 per cent 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 per cent 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.
In Budget 2016-17, government has announced bringing in amendment to the RBI Act to create a Monetary Policy Committee which will further strengthen monetary policy credibility.
"The Government has adhered to the path of fiscal consolidation and this will support the disinflation process going forward," the RBI said.
The government in 2016-17 Budget has stuck to fiscal deficit roadmap to lower deficit to 3.5 per cent of GDP in current fiscal. Fiscal deficit in 2015-16 came in below 3.9 per cent.
RBI today cut repo rate by 0.25 per cent and introduced a host of measures to smoothen liquidity supply so that banks can lend to the productive sectors and indicated accommodative stance going ahead.
Retail inflation was at a 3-month low of 5.18 per cent while WPI inflation remained in negative zone for 16th consecutive month and fell to (-)0.91 per cent in February.