INDIAN CURRENCY SYSTEM

Prof. Isha Jaiswal

Introduction RBI being the central bank of the country, its main

function is to control the currency system in accordance with the economic policy of the government.

RBI uses its monetary policy as an effective tool for economic stability and economic growth in India.

In India the main unit of money is known as “Rupee” and the smallest unit of money is known as “Paisa”.

Legal Provisions regarding issue of currency

India is the member of the International Monetary Fund Organization and hence for the conversion into foreign currency Rupee is considered to be the converting tool.

At present, bank notes in India are issued in the denomination of Rs.5 Rs.10, Rs.20, Rs.50, Rs.100, Rs.500, Rs.1000, Rs.5000. These notes are called bank notes as they are issued by the Reserve Bank of India and signed by the governor of the reserve bank.

The Reserve Bank can also issue bank notes in the denominations of five thousand rupees and ten thousand rupees, or any other denomination that the Central Government may specify. There cannot, though, be bank notes in denominations higher than ten thousand rupees in terms of the current provisions of the Reserve Bank of India of Act, 1934.  Coins can be issued up to the denomination of Rs.1000.

Legal Provisions regarding issue of currency

In terms of Section 25 of RBI Act, 1934 the design of bank notes is required to be approved by the Central Government on the recommendations of the Central Board of the Reserve Bank of India.

As required by the RBI, Act, 1934 The Reserve Bank maintains two departments i.e. issue department and bank department.

Issue Department: The issue department is responsible for the issue of notes and these notes are its liability. The assets of the issue department against which bank notes are issued consist of the following:

Gold coins and bullion Foreign Securities Rupee Coins Government of India rupee securities Credit papers

The following provisions are laid down in the Reserve Bank Act, 1934 pertaining to the issue of currency notes by the bank

The issue department of the bank alone can issue notes. The assets of the issue department should be completely

separate from the banking department of the Reserve Bank. All the notes issued by the Reserve Bank are legal tender and

are guaranteed by the central government. RBI should have the prior approval of the central government

regarding the decision and material of the notes issued. The central government has its power to demonetize any

series of the notes issued by RBI. No stamp duty is payable by the Reserve Bank in respect of

notes, issued by it.

Proportional Reserve System of Note Issue

Proportion means a part, percentage or share of something regarded as a collective whole.

Reserve implies something valuable stocked up systematically or stored carefully often on a large scale at a secured location.

A System comprises a set of detailed procedures, routines, and methods that are supposed to be followed to perform certain activities.

Proportional Reserve System of Note Issue

In Proportional Reserve System (PRS), certain proportion or percentage of the reserves has to maintained in the form of precious metals like Gold. The remaining part of the reserves is to be kept in specific assets such as Government Securities and Commercial Bills. Such a balance is maintained to give backing (support) to the total volume of currency notes issued by the apex central bank of a nation like RBI in India.

Proportional Reserve System of Note Issue

India followed Proportional Reserve System of note issue between 1935 and 1956.

The original RBI Act of 1934 had a provision that mentioned the issuance of currency notes must be according to the Proportional Reserve System.

The original act required RBI to maintain 40% of reserves in Gold for backing the issue of currency notes in India.

On 6th October 1956, RBI replaced PRS with another method of note issue called ‘Minimum Reserve System.’ This step was taken to enable and fulfill the expanding currency needs of the Indian economy.

Limitations of Proportional Reserve System

Precious metals remained locked in vaults of reserves, and their productive use hindered. It was a waste of valuable metallic resources.

This system adversely affects the economy an excessive supply of money in the economy cause to create certain economic problems.

Excessive money cause to decrease the purchasing power of the currency, which badly affect the common man.

Though it was easy to expand (increase) the money supply, it was difficult to contract (decrease) supply of paper notes in case the reserves fell.

Minimum Reserve System of Note Issue

Since 1957, the Issue Department is maintaining minimum reserve system where it maintains a minimum reserve of gold and foreign securities to the extent of Rs. 200 crore of which the gold reserve should be of minimum value not less than Rs. 115 crore.

Merits of Minimum Reserve System

This system is much elastic which can meet the ever-changing needs of the money by the govt.

Because a fixed amount of gold, silver or foreign exchange is to be maintained as fixed minimum reserve, therefore it becomes much economical and government can also change the fixed minimum reserve at anytime.

Demerits of Minimum Reserve System

Under this method, there is a danger of excessive note issue, which consequently brings inflation. This inflation adversely affects the economy.

An excessive note issue cause to decrease. in the currency value this decrease in the value of currency cause to contract the purchasing power of the consumers.

Minimum vs. Proportional Reserve System

The central banks are required by law to keep gold and foreign securities against the issue of currency notes. Under the proportional reserve system, the amount of gold and foreign securities bears a fixed proportion, between 25 to 40% of the total notes issued .Under the minimum reserve system on the other hand, a minimum fixed amount of gold and foreign securities is kept against note issue by the central bank.

Minimum vs. Proportional Reserve System

In the proportional reserve system additional notes can be issued only by increasing the reserve of gold and foreign securities in the fixed proportion. In the minimum reserve system, notes can be issued in any amount after keeping the minimum reserve of gold and foreign securities

What are soiled, mutilated and imperfect banknotes?

Soiled Notes: means a note which, has become dirty due to usage and also includes a two piece note pasted together wherein both the pieces presented belong to the same note, and form the entire note.

Mutilated bank note: It is a banknote, of which a portion is missing or which is composed of more than two pieces.

Imperfect banknote: It means any banknote, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable but does not include a mutilated banknote.

Management of Indian Currency

As the currency authority, the RBI provides different denominations of currency notes for facilitating the transactions of central and state governments and caters to the exchange and remittance needs of the public banks as well as the government departments.

Notes in Circulation

Currency Chest Currency chests are storehouses where bank notes

and rupee coins are stocked on behalf of the Reserve Bank. Currency management infrastructure consists of a network of 19 issue offices, 4,132 currency chests (including sub-treasury offices and a currency chest of the Reserve Bank at Kochi) and 3,813 small coin depots of commercial, co-operative and regional rural banks spread across the country.

Currency Distribution The life of the paper used in the preparation of currency is short and

hence the proportion of the coins in circulation has been increased to a large extent.

For the distribution of coins the services of post-offices, railways, road transport etc are being used and above the services rendered by the banks.

Steps for introducing new currency notes in the market or withdrawal of old coins are taken by RBI.

For testing the currency notes, RBI has introduced “Currency Verification and Processing System” in its 18 offices using such 48 (CVP) systems in the country.

This system classifies the currency notes into issuable, non-issuable and reject able.

Clean Note PolicyDemand for currency is estimated using

econometric models inter alia, factoring in real GDP growth prospects, rate of inflation and disposal rate of soiled notes denomination-wise.

Accordingly, the total supply of banknotes was raised to 23.7 billion in 2014-15 from 20.9 billion pieces (an increase of 13.1 per cent) in 2013-14. Coins was also increased by 3.0 per cent in 2014-15 as compared to 11.6 per cent in 2013-14.

Clean Note PolicyThe main precautionary steps for cleanliness of the

notes can be counted as follows:1. The packages of the currency notes should not

be stapled by the pins.2. The new notes should be provided to the banks

for issue.3. The torn notes should be withdrawn from the

circulation.4. The speed of mechanized processing of notes in

the offices of RBI should be increased.

Counterfeit Notes

Counterfeit Notes During 2014-15, 594,446 pieces of

counterfeit notes were detected in the banking system, of which 95.6 per cent were detected by commercial banks, while 4.4 per cent were detected at the Reserve Bank offices.

2014-15, the number of counterfeit notes detected increased for all denominations except `2 and `5.

Printing of Currency Notes For printing currency notes, the RBI has established its

completely associated printing press known as RBI Printing (Press) Private Limited.

This establishment of RBI has two press situated one at Mysore (Karnataka) and other at Salbony (W. Bengal).

Based on the orders issued by the govt. and RBI , these two press print the currency notes as per the designs and qualities of the papers approved by these two authorities, and make delivery of the notes to RBI.

This printing press institution has been confirmed by the ISO-9001 certificate which is considered to be the first institution of the world.

Demonetization of high Denomination Currency Notes

Objective of demonetization measure of January 1978 was the aim of demonetization of high denominations currency was to prevent illegal transactions carried on.