The higher HRA would have a direct and immediate impact on headline CPI through an increase in housing inflation.
Assuming a rate of increase in the HRA as proposed by the 7th CPC is implemented from early 2017-18 onwards and the State Governments implement a similar order of increase with a lag of one quarter,CPI inflation could be 100-150 bps higher than the baseline for 2017-18.
The HRA impact on inflation is expected to persist for 6-8 quarters, with the peak effect occurring around 3-4 quarters from implementation. In addition, indirect effects could occur from elevated inflation expectations.
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