Indian rupee
In Picture: Indian rupeeReuters file

The Union Cabinet has cleared 2 percent hike in dearness allowance (DA) at a meeting held on Thursday. The hike will be effective from July 2016. The decision will benefit about 50 Central government employees and comes days ahead of Diwali.

"The proposal to provide 2% dearness allowance and dearness relief to central government employees and pensioners respectively, is listed on agenda of the Union Cabinet meeting scheduled for tomorrow," PTI quoted an official familiar with the matter as saying.

It is not clear whether the hike will be applicable to pensioners as well. There are about 58 lakh Central government pensioners.

The hike in DA is lower than that demanded by the trade unions.

"The 12-month average of Consumer Price Index for Industrial Workers from 1 July 2015 to 30 June 2016, works out to be 2.92%. Therefore the unions had pressed for 3% DA. We are not satisfied with this," president of confederation of central government employees K K N Kutty said, reported PTI on Wednesday.

Cabinet clears release of installment of Dearness Allowance to Cent Govt employees & Dearness Relief to Pensioners w.e.f 01.07.2016: Jaitley

— ANI (@ANI_news) October 27, 2016

The government is yet to take a decision on hike in allowances as proposed by the 7th Central Pay Commission (CPC). A committee appointed by the government to look into the recommendations on allowances was appointed in June and was supposed to give its view within four months.

The CPC had examined 196 allowances and given its recommendations on abolishing or raising some of them while recommending others to be subsumed with other perks.

The recommendations of the 7th CPC cover 47 lakh Central government employees and 53 lakh pensioners, of which 14 lakh employees and 18 lakh pensioners are from the defence forces.

The 7th CPC had proposed 138.71 percent hike in HRA and 49.79 percent for other allowances while submitting its voluminous report last November.

Unlike concerns that the recommendations of the CPC will spike inflation, the RBI's Monetary Policy Committee (MPC) at its first meeting early this month shrugged off such fears.

"Some of the upside risks to inflation discussed in the MPC meeting on October 3 and 4, 2016, particularly arising out of the award of the 7th Pay Commission, are largely statistical according to me. Looking forward, in my opinion, the probability of inflation turning up from the current level is reasonably less," Ravindra H. Dholakia said, according to the minutes of the MPC meeting.

The MPC has six members, three of whom have been nominated by the Central government.