India’s M3 money supply growth held steady at 12% in May 2025, unchanged from the previous month. The reading indicates that broad liquidity conditions remained stable over the period, with no acceleration or deceleration in the pace of monetary expansion.
The unchanged 12% year-on-year rate suggests that the underlying drivers of M3—currency with the public, demand deposits, time deposits and other components—collectively produced a similar outcome to April. The data points to continuity in system-wide liquidity trends as the economy moved through May.
Inflation And RBI Policy Outlook
That steady 12% M3 money supply figure from May 2025 was an early indicator of the excess liquidity that we see in the system today. This has directly contributed to current inflationary pressures, with the latest CPI data for May 2026 showing inflation at 5.9%, uncomfortably close to the Reserve Bank of India’s 6% ceiling. We believe the RBI’s focus will remain squarely on inflation control for the remainder of the year.
Given this backdrop, we anticipate the RBI will maintain its hawkish stance, and we are pricing in at least one more 25 basis point rate hike before year-end. The overnight indexed swap (OIS) market is not yet fully reflecting this potential, creating an opportunity for traders. We are advising clients to look at paying the 1-year OIS rate, betting that short-term interest rates will rise more than currently expected.
Equity And Currency Market Strategies
For equity derivatives, this monetary tightening is a headwind, particularly for growth and rate-sensitive stocks. With the Nifty 50 index showing signs of stalling after its recent rally to 24,000, we are using this strength to build defensive positions. We recommend buying Nifty put options with a three-month expiry as a cost-effective hedge against a potential 5-7% market correction.
In the currency market, the RBI’s likely actions should lend support to the Indian Rupee. The widening interest rate differential between India and the US, where the Federal Reserve is now expected to hold rates steady, makes the Rupee an attractive carry trade. We see opportunities in selling out-of-the-money USD/INR call options, capitalizing on expected range-bound movement and volatility decay.
