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Why is RBI determined for to keep a tight policy in the 7th Pay Commission HRA allowance?

There has been a long going demand by the central government employees for a hike in fitment factor and the related salary hikes. But the recent developments in this scenario are focusing on the concerns about 7th CPC linked HRA allowances' impact on CPI inflation by the Reserve Bank of India (RBI). One of the major reasons why RBI is keeping a tight policy is the 7th CPC HRA and it is refusing to cut interest rates because of runaway inflation risk. But at the same time this policy is forcing towards economic growth.  

Inflation figure is used by the Reserve Bank of India (RBI) to carry out its monetary policy. The target headline inflation for RBI is 4 per cent along with a tolerance band of plus or minus 2 per cent. If there are any risks of crossing this band, RBI takes action to ensure inflation does not rise any further as it will be harmful to everyone concerned. 7th pay commission HRA is one of the factors that carries this threat. (IANS)

How 7th pay commission affects inflation? Consumer price index (CPI) inflation is the headline measure used by the Reserve Bank of India (RBI) to carry out monetary policy.  Triggered by the HRA effect, housing inflation in CPI rose from 4.7 per cent in June 2017 to 8.2 per cent by December, lingering around that level in 2018 up to July prior to edging down in August and September as the HRA effect started to decline.  (Agencies)

7th pay commission HRA effect: RBI said, "The current experience is not one off. Such large increases have in past too pushed up inflation significantly. Since the housing index in CPI-IW is adjusted once in every six months, unlike headline CPI, the impact was not gradual but came as steep increases – first in January 2018 and then July when the housing index is reset. Due to higher weight of housing, the impact of HRA revision was much higher in CPI-IW."  (Reuters)

Following the 7th Pay Commission HRA award, the share of housing in CPI-IW inflation climbed in January 2018 and gained substantial proportion by July-August 2018. Adjusting for the HRA effects, the July and August print of CPI-IW inflation at 5.6 per cent was markedly lower at 1.7 per cent.  (PTI)

In the past also RBI has found 7th Pay Commission HRA-inflation. Using this approach, it is observed that CPI-IW inflation was moved forward by 200 and 400 basis points following the 5th and 6th CPCs, respectively, RBI said.  (Reuters)

Even while these points are under scrutiny the central government employees are not very much concerned with the 7th Pay Commission based HRA. They are more focused towards their demands for pay hike that are not being approved as this issue has been dragging for years. It is entirely dependent now on the Centre court and it needs to come to a decision as to what should be done. (PTI)

To the relief of central government employees and others, many analysts, are of the view that the impact of HRA allowance would not be as gruesome as it appears, and RBI will manage to overcome inflation problems.

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