Money Supply

Money supply refers to the total stock of money available in an economy at a given point in time, and its measures — M0, M1, M2, M3, and M4 — differ by liquidity, with M3 (Broad Money) serving as the RBI's primary measure for monetary policy purposes, since it captures the full range of money used for both transactions and store-of-value purposes. M4, the broadest of these measures, adds deposits with Post Office Savings Banks (excluding National Savings Certificates) to M3, and is used less frequently in policy discussions since post office deposits form a comparatively small and slow-changing share of the money supply.

India's M3 currently stands at approximately ₹318.9 lakh crore as on June 30, 2026.

The narrower M1 measure, at around ₹80.1 lakh crore, is considerably smaller than M3, reflecting the fact that a large share of India's money supply sits in less liquid, interest-bearing forms such as time deposits, rather than in cash and demand deposits available for immediate spending.

A closer look at the composition of M3 shows two structural trends.

First, bank credit to the commercial sector accounts for close to 71.5% of M3, a new high, indicating that credit creation by banks — rather than currency issuance by the RBI — is the dominant driver of money supply growth in the current cycle. This is consistent with the credit creation process, where a single unit of reserve money supports a much larger expansion of the money supply as banks lend out a portion of every deposit they receive, a relationship captured by the money multiplier.

Per the RBI's Weekly Statistical Supplement, the money multiplier stood at approximately 6.07 as on June 30, 2026. Meaning banks are holding relatively less in reserves and the public relatively less in cash, both of which allow a given unit of reserve money to support a larger expansion of bank deposits and credit.

Second, currency held by the public makes up only around 13.2% of M3, underscoring how far the Indian economy has shifted toward bank-intermediated money over cash, aided by financial inclusion measures and the growth of digital payments.

Inflation: The Last Year in Perspective

Inflation measures the rate at which the general price level rises over time, and India tracks it through two primary indices — CPI, which reflects retail prices paid by consumers, and WPI, which reflects prices at the wholesale or factory-gate level.

Through the middle of 2025, CPI inflation fell to some of its lowest readings in decades. From 1.55% in July 2025 — an eight-year low — inflation kept falling through the following months, touching a record low of 0.25% in October 2025, before edging up marginally to 0.71% in November. This collapse was driven primarily by a sharp, sustained decline in food prices (the CFPI actually recorded negative, deflationary readings for several months in 2025), aided by a favourable base effect from elevated prices the year before. This was among the lowest inflation India has recorded in the CPI series' history, and it briefly pushed headline inflation well below the RBI's 2-6% tolerance band, on the low side rather than the more familiar high side.

From early 2026 onward, two things happened.

• First, MoSPI transitioned to a revised CPI series with base year 2024=100 in February 2026, replacing the outgoing 2012-based series, and rebalanced the basket's weights using the Household Consumption Expenditure Survey 2023-24 — increasing the weight given to non-food items relative to the old series.
• Second, actual price pressure began building through the year. Driven overwhelmingly by a 30%+ surge in fuel and power prices tied to the West Asia conflict and elevated global crude prices.

The most recent data available, for June 2026, shows this build-up continuing on the retail side and broadening on the wholesale side: CPI combined inflation rose to 4.4% YoY (from 3.93% in May), with rural inflation (4.7%) still running ahead of urban (3.9%). On the wholesale side, headline WPI edged up to 9.9% YoY, and while WPI Fuel & Power eased somewhat from its May peak (27.4%, down from 30.33%), WPI Primary Articles inflation jumped sharply, from 4.99% to 7.0% YoY — suggesting the price pressure is starting to broaden beyond fuel and into food and raw-material prices rather than easing as the earlier fuel-driven spike fades.

Monetary Policy

The COVID Response and Aftermath (February 2020 – February 2023)

As the COVID-19 pandemic brought economic activity to a near-standstill in early 2020 — with businesses shut, demand collapsing, and unemployment rising sharply — the RBI's priority shifted entirely toward supporting growth and liquidity, even at the cost of temporarily looking past its inflation mandate. The RBI cut the repo rate in two steps: to 4.40% effective March 27, 2020, and further to 4.00% effective May 22, 2020 — its lowest level in the modern policy framework. The RBI held the repo rate at this record low of 4.00% for nearly two years, through 2020 and 2021, prioritizing economic recovery over inflation control.

As the economy reopened through 2021 and early 2022, pent-up demand collided with disrupted global supply chains, pushing prices upward. This was sharply compounded by Russia's invasion of Ukraine in February 2022, which sent global crude oil, natural gas, edible oil, and wheat prices soaring, since both countries were major exporters of energy and food commodities; India, as a large net importer of crude oil, felt this directly through higher import costs and a weaker rupee. Combined, these pressures pushed inflation well above the RBI's target band, prompting a steep reversal: the RBI raised the repo rate in six steps — to 4.40% (May 4, 2022), 4.90% (June 8), 5.40% (August 5), 5.90% (September 30), 6.25% (December 7), and 6.50% (February 8, 2023).

The Extended Pause (February 2023 – January 2025)

Through this period, the RBI held the repo rate steady at 6.50%, maintaining a prolonged status quo as it waited for inflation to durably settle within its target band following the post-COVID price surge.

The Easing Cycle (February 2025 – December 2025)

This pause ended in February 2025, when the RBI began cutting rates in response to the sharp decline in inflation discussed in the previous section — headline CPI had fallen well below the 4% target, and by late 2025 was recording some of its lowest readings on record. The MPC cut rates through the year in stages, taking the repo rate down by a cumulative 100 basis points, including a 25-basis-point cut in December 2025 that brought the rate to 5.25%. The Cash Reserve Ratio easing cycle had, in fact, already begun earlier: the RBI cut CRR to 4.25% effective December 14, 2024, and further to 4.00% effective December 28, 2024, before continuing the reduction to 3% in four tranches of 25 basis points each between September and November 2025 — a CRR easing arc that therefore spans close to a full year, releasing an estimated ₹2,50,000 crore in liquidity into the banking system over that period.

The Current Pause (June 2026)

The MPC's most recent meeting, held over June 3-5, 2026 under Governor Sanjay Malhotra, the committee unanimously voted, 6-0, to hold the repo rate at 5.25% and retain a neutral stance. The RBI revised its FY27 inflation forecast upward, from 4.6% to 5.1%, while simultaneously lowering its FY27 growth forecast from 6.9% to 6.6%.

The committee explicitly flagged the prolonged West Asia conflict, elevated global energy prices, supply-chain disruptions, and an uncertain monsoon and El Niño outlook as the key risks shaping this outlook, alongside broader global market volatility and weakening business sentiment.

What Else the RBI Did Over the Last Year

Open Market Operations: Managing Durable Liquidity

Beyond the repo rate and CRR cuts, the RBI used Open Market Operations (OMOs) to inject liquidity directly into the banking system, purchasing ₹1,00,000 crore of government securities in December 2025. Its use alongside the CRR cut in the same period suggests the RBI was managing liquidity through multiple channels simultaneously, rather than relying on a single instrument.

The Dollar-Rupee Swap: Managing External Liquidity

The RBI also used a 3-year dollar-rupee buy-sell swap of $1 billion in December 2025, a tool aimed at managing rupee liquidity and exchange rate stability together. In a buy-sell swap, the RBI buys dollars from banks in exchange for rupees today, and commits to selling those dollars back at a pre-agreed rate at the end of the term — this simultaneously injects rupee liquidity into the banking system in the short term while managing the RBI's forward exposure to the exchange rate.