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

QuantEco Research says delayed 8th CPC payouts with arrears could fuel inflation, tilt growth balance and push RBI to resume rate hikes in late FY27 or early FY28

The 8th Central Pay Commission (CPC) payouts are likely to tilt the growth-inflation balance somewhat ‘unfavourably’ and could trigger the Reserve Bank of India’s (RBI’s) rate-hiking cycle in late 2026-27 (FY27) or 2027-28 (FY28), according to a recent report by private think tank QuantEco Research.

 

The report argues that the 8th CPC is facing administrative delays, and final implementation is expected to be delayed by at least a year, implying that revised payouts will be disbursed with sizeable arrears. This, in turn, will affect both growth and inflation.

 

Payouts with considerable arrears are expected to hit core inflation harder, as they boost demand for goods and services over time and trigger an immediate reset of housing rents.

 

“Payouts with arrears, while providing some growth support through consumption, will also exert higher inflationary pressure (via a reset in the housing component and increased 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/FY28,” the report observes.

 

Since February, the central bank’s monetary policy committee has cut the repo rate by 100 basis points (bps). In its latest review on August 6, it unanimously decided to keep the policy rate unchanged at 5.5 per cent, maintain a neutral monetary stance, and revise the inflation outlook for the current financial year (2025-26/FY26) down by 60 bps to 3.1 per cent.

 

The report adds that the delay in 8th CPC payouts will likely shift the fiscal impetus to growth — initially pencilled in for FY26 — to FY27 and early FY28.

 

“Historically, lump-sum payouts with arrears propel urban discretionary consumption, a classic real-world example of Engel’s law. Household spending is biased towards big-ticket items such as cars, consumer electronics, and services like air travel. Aa a corollary, a portion of the increased disposable income is also likely to flow into savings, possibly bank deposits and equity investments,” the report notes.

 

The report mentions that the 8th CPC’s fitment factor could be close to 2, compared with 2.57 under the 7th CPC. This would revise the minimum pay to ₹35,000–37,000, up from ₹18,000 under the 7th CPC. The total cost to the exchequer — including revision in pay, allowances, and pensions — could range from ₹2–2.5 trillion, more than double the 7th CPC’s cost of ₹1 trillion.

 

“Assuming a marginal propensity to consume of 0.6–0.7, we estimate the 8th CPC’s impact on annualized private final consumption expenditure growth at 65–80 bps and on gross domestic product (GDP) growth at 40–50 bps. With CPC payouts adding at least 0.6 per cent to the fiscal deficit-to-GDP ratio, the government will need to create fiscal space for financing,” the report adds.

 

Thus, financing the committed expenses under the 8th CPC presents a ‘golden’ opportunity to push through pending goods and services tax reforms, as the compensation cess is likely to be phased out by fourth quarter of FY26.