MUMBAI: The Reserve Bank of India (RBI) on Thursday said inflation remains a key concern, constraining monetary policy from utilising any available room to support growth.

It pointed out that 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 RBI said in its 2020-21 annual report.

The monetary policy committee (MPC) would meet during 2-4 June and is expected to maintain the accommodative stance for the whole of calendar year 2021.

Outgoing CII chairman and Kotak Mahindra Bank chief executive Uday Kotak had told Mint on Wednesday that this is a time when monetary policy has to support while he fiscal steps up and one cannot have a situation where the interest rates go up in the short-run.

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 than 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," it said.

It believes that 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.

“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," it said, adding 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.

RBI 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 flexible inflation target in the 2-6?nd for the five years through 31 March 2026.

Transmission to banks’ 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, it said.

However, while the pace of economic recovery in 2020-21 turned out to be faster than anticipated, RBI said that the outlook is weighed down by several uncertainties and would depend upon the evolving trajectory of infections and vaccinations.

“A durable recovery will be dependent on continued policy support," it said.