RAJAN KEEPS RATES UNCHANGED
House rent allowance to push up retail inflation, says deputy governor Urjit Patel
RBI governor Raghuram Rajan kept key policy rates unchanged while nudging banks to ensure quicker transmission of the rate cuts effected so far. Faster transmission would help pass on the benefit to borrowers in terms of lower EMIs, for which Rajan proposed a fresh look at the way banks calculate base rate against which lending rates are benchmarked.
MUMBAI: The Reserve Bank of India, while keeping key interest rates unchanged on Tuesday, opted to closely monitor the inflation trajectory, following the Centre’s recent move to raise salaries for government employees.
In its fifth bi-monthly policy review, the central bank kept the repo rate — the rate at which banks borrow from the RBI — at 6.75% and the cash reserve ratio — the proportion of deposits banks have to park with the central bank — at 4%, but was wary of the impact from the Pay Commission recommendations to raise salaries by 23.55%.
“The implementation of the Pay Commission’s proposals and its effect on wages and rents will be a factor in the Reserve Bank’s future deliberations,” governor Raghuram Rajan said in his opening remarks on the policy.
“In the broad sense, yes there is going to be additional expenditure, but that will be offset presumably by either additional revenue raising or cuts elsewhere, so that the fiscal consolidation path is maintained,” Rajan said while addressing reporters after the monetary policy statement.
Increase in wages and allowances puts more money in the hands of people, which could fuel inflation, especially at a time when the central bank is striving to squeeze liquidity and rein in inflation to attain the 5% retail inflation target by January 2017.
The Seventh Central Pay Commission recommended the hike in pay allowances and pensions, which according to analysts will lead to an injection of about `3,40,000 crore into the system. The new pay scales, subject to acceptance by the government, will come into effect from January 1, 2016.
“One impact that will be felt through the CPI index would be via the house rent allowance. That’s a one-time level change and unless there are wider externalities, we will most likely look through that. But you will feel it in the index, through the housing sub-component of the CPI index,” RBI deputy governor Urjit Patel said.
The issue has also been highlighted by a cross section of banks and experts. Rating agencies and brokerages have also said that the proposed hike in salaries and pensions of government employees could hurt the government’s finances.
In a report issued on Tuesday, UBS said: “A steep rise in allowances implies a 23% total pay increase. Assuming states adopt the same too, this implies a 150 basis point over GDP, increase in the wage bill for 2016-17. When and how this will be actually implemented and how it will be funded will be a big driver of emerging macro framework in India. Fiscal consolidation is a stated policy objective for the government and so is the investment cycle.”
Speaking to HT, Axis Bank chief economist Saugata Bhattacharya said the central bank was taken by surprise. “The RBI seems not to have expected the hike. They have room for another 25 basis point cut in interest rates but only after considering the impact from the pay hike.”
“The governor’s indication of accommodative policy sends a positive signal for the economy,” said Arundhati Bhattacharya, chairperson of SBI.
“The RBI has maintained a balance between its inflation focus and growth push. It is a balanced policy call,” economic affairs secretary Shaktikanta Das said.