8th pay commission payout may trigger rate hike cycle in FY27: Report

Business Standard

5 hours ago

The 8th central pay commission (CPC) payouts are likely to tilt the growth-inflation balance somewhat unfavourably and trigger the Reserve Bank of India's (RBI's) rate hiking cycle in late FY27 or FY28, according to a report by private think tank QuantEco Research.
The report noted that the 8th CPC is facing administrative delays, with final implementation expected at least a year later than initially anticipated. This implies that revised payouts will be disbursed with sizable arrears, impacting both growth and inflation. Payouts with arrears will weigh more heavily on core inflation as they fuel demand for goods and services over time and cause an immediate reset of housing rents. 'Payout with arrears, though offering some growth support via consumption, will also exert inflationary pressure — through a reset in the housing component and higher demand for other core components. This will tilt the growth-inflation balance unfavourably, prompting the RBI to embark on a rate hiking cycle in late FY27 or FY28,' the report said. Since February, the monetary policy committee (MPC) of the RBI has cut the repo rate by 100 basis points (bps). In its review meeting on August 6, it unanimously decided to keep the policy rate unchanged at 5.5 per cent, while maintaining a neutral stance and cutting the inflation outlook for the current financial year by 60 bps to 3.1 per cent. The report added that the delay in 8th CPC payouts will push the fiscal impetus to growth — earlier expected in FY26 — to FY27 and early FY28. 'Historically, lump-sum payouts with arrears propel urban discretionary consumption. This is a classic real-world application of Engel's law. Household spending tends to shift towards big-ticket goods such as cars, consumer electronics, and services such as air travel. At the same time, part of the rise in disposable incomes will also flow into savings — possibly bank deposits and equity investments,' the report said. The report further highlighted that the 8th CPC's fitment factor could be close to 2, compared with 2.57 under the 7th CPC. This would raise the minimum pay to Rs 35,000–37,000, from Rs 18,000 fixed under the 7th CPC. The overall cost to the exchequer for revising pay, allowances and pensions could range between Rs 2 trillion and Rs 2.5 trillion, more than double the 7th CPC's cost of Rs 1 trillion. 'Assuming a marginal propensity to consume (MPC) between 0.6 and 0.7, we estimate the impact of the 8th CPC to be 65–80 bps on annualised private final consumption expenditure (PFCE) growth and 40–50 bps on GDP growth. With CPC payouts adding at least 0.6 per cent to the fiscal deficit-to-GDP ratio, the government will have to create fiscal space for financing,' the report said. It added that financing these committed expenses under the 8th CPC presents a 'golden opportunity' to push through pending goods and services tax (GST) reforms, as the compensation cess is likely to be phased out by Q4 FY26.