The RBI today forecast upside risks to the 5 per cent inflation target by March 2017 which emerge from food inflation, higher payout following minimum wage revision and pay commission recommendations.
The interest rate setting Monetary Policy Committee (MPC) at its first meeting took note of potential cost push pressures that may emerge, including the 7th Pay Commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.
“The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root. On balance, the committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside,” the RBI said.
It said the government has announced several measures to ease food inflation pressures, especially with regard to pulses and if these efforts are sustained then food inflation could come down by 0.35 per cent in the fourth quarter of current fiscal.
Continuous policy actions through a process of relative price adjustments could moderate overall inflation by 0.15 per cent in fourth quarter of 2016-17 and 0.50 per cent by fourth quarter of 2017-18, the central bank said.
In a forward-looking perspective, inflation developments are likely to be influenced by three domestic drivers — spatial distribution of food inflation pressures, implementation of the 7th pay panel award and the 42 per cent increase in minimum wages across the board.
Retail inflation in August eased to a five-month low of 5.05 per cent, with that in pulses remaining high at 22.01 per cent.
Pulses, which have a weight of just 2.4 per cent in the CPI index, have accounted for around 12-20 per cent of overall inflation since mid-2015, manifesting structural demand supply imbalances rather than transient mismatches, the RBI said.