INR Inches Up, RBI and Government Flex Financial Muscle in Money Market

Image Source: The Financial Express

The Indian rupee opened slightly stronger against the US currency on May 23, 2025, following active liquidity management by the Reserve Bank of India (RBI) in the money market. The central bank announced strong cash balances for banks and the government, showing continued efforts at balancing liquidity in light of changing market conditions.

Rupee Movement

The Indian rupee (INR) opened at 85.9650 against the US dollar, an increase of 0.04% from the last close of 86.0025.
The exchange rate represents a marginal appreciation, consistent with the recent developments whereby the rupee witnessed modest movements compared to the dollar.

RBI Money Market Operations

On May 22, 2025, the RBI executed multiple money market operations such as repos, reverse repos, and standing facilities to regulate short-term liquidity.
The central bank injected and absorbed liquidity via its Liquidity Adjustment Facility (LAF), Marginal Standing Facility (MSF), and Standing Deposit Facility (SDF).
Net liquidity injected against outstanding operations was at ₹34,466.56 crore, and the net liquidity including the day's operations showed an absorption of ₹1,31,690.44 crore.

Banking Sector Cash Balances

Cash balances of ₹9.62 trillion were held by scheduled commercial banks with the RBI as of May 22, 2025.
The fortnightly average daily cash reserve requirement as of May 30, 2025, stood at ₹9.49 trillion.

Government Cash Position

The surplus cash balance of the Government of India with the RBI available for auction stood at ₹43.41 billion as of May 22, 2025.
High government cash balances have been causing periodic system liquidity pressures, especially after advance tax and GST payments.

Liquidity Trends and RBI Actions

System liquidity continued to stay in excess during April and May with the help of aggressive RBI interventions, such as open market operations (OMOs) and variable rate repo (VRR) auctions.
RBI pumped a total of ₹2.65 lakh crore into the banking system during the ongoing financial year till May 19, 2025, via OMOs and VRR auctions.
Even with excess liquidity, there have been periods of stress due to higher government balances and currency with the banks.

Refinance Operations

On 22 May 2025, RBI extended ₹87.36 billion of refinance operations to facilitate short-term liquidity requirements.

Sources: The Week, YCharts, Business Standard