RBI admits inflation remains a key concern

Inflation remains a key concern, constraining monetary policy from utilizing any available room to support growth, says the Reserve Bank of India (RBI). It said India needs to put more effort in order to mitigate supply-side driven inflation pressures.

“Monetary policy will monitor closely all threats to price stability to anchor broader macroeconomic and financial stability while continuing with the accommodative stance,” the central bank said in its 2020-21 annual report.

While inflation, measured by the wholesale price index, softened in 2020-21, there was no pass through to retail inflation. According to RBI, the substantial wedge between wholesale and retail price inflation during the year pointed to persistence of supply-side bottlenecks and higher retail margins, underscoring the importance of supply management.

“The extent of retail price increase in the post-lockdown period was also much higher that the usual summer uptick in food prices. The gap between retail and wholesale price inflation, a proxy for retail margins or mark-ups also remained unusually high,” RBI said. “Pressures from food items like pulses and edible oils are likely to persist in view of supply-demand imbalances, while cereals’ prices may continue to soften with the bumper foodgrain production in 2020-21.”

It said crude oil prices have picked up on optimism of demand recovery and continuation of OPEC plus production cuts; and are expected to remain volatile in the near-term. RBI stated that as pandemics typically leave markets less competitive, the increase in number of active COVID-19 cases with the beginning of second wave along with the associated effects on supply chains could also affect inflation going forward.

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The Central Bank said the monetary policy in 2020-21 had to deal with the twin challenges of reviving growth from the ravages of COVID-19 while also ensuring that inflation eased from above the upper tolerance band to align with the target. As part of its inflation-targeting mechanism, the government has retained RBI’s flexibility inflation target in the 2-6% band for the five years through 31 March 2026.

It stated that transmission to bank’s deposit and lending rates improved significantly on the back of surplus liquidity conditions and the mandated external benchmark system of the pricing of loans for specified sectors.