General Awareness

April 04, 2017 @ 01:15 PM

RBI and Currency Management

GK / General awareness is a must for cracking MBA entrance exams & thereby GD & PI  and for few IIMs- Extempore Speech , Written Ability Test. 

MBARendezvous.com -India's content lead MBA website  has started series of articles to equip MBA aspirants with general awareness with the hope that you would get success in various MBA entrance exams

Following article on”RBI and Currency Management” is part of our series on GK / General Awareness: 

Reserve bank of India is the sole authority of the country responsible for the management of currency circulation as well as its printing. The various monetary policy tools like Cash Reserve ratio, Statutory Liquidity Ratio, repo and Reverse Repo, Bank rate etc, along with the printing of fresh currency are the parts of its monetary management. 
 
Along with printing, Reserve Bank also co-ordinates with the Government in the designing of banknotes, including the security features. The Reserve Bank estimates the quantity of banknotes that are likely to be needed denomination-wise and accordingly, places indent with the various printing presses. Banknotes received from banks and currency chests are examined and those fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of banknotes in circulation.
 
The Reserve Bank decides the volume and value of banknotes to be printed each year. The quantum of banknotes that needs to be printed, broadly depends on the requirement for meeting the demand for banknotes due to inflation, GDP growth, replacement of soiled banknotes and reserve stock requirements. 
 
However, the Government of India decides the quantity of coins to be minted on the basis of indents received from the Reserve Bank. The Reserve Bank presently manages the currency operations through its 18 Issue offices located at Ahmedabad, Bangalore, Belapur, Bhopal, Bhubaneswar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi, Patna, Thiruvananthapuram, one sub-office at Lucknow, a currency chest at Kochi and a wide net work of currency chests. 
 
These offices receive fresh banknotes from the banknote printing presses. The Issue Offices of RBI send fresh banknote remittances to the designated branches of commercial banks.   
 
The Reserve Bank offices located at Hyderabad, Kolkata, Mumbai and New Delhi (Mint linked Offices) initially receive the coins from the mints. These offices then send them to the other offices of the Reserve Bank. The banknotes and rupee coins are stocked at the currency chests and small coins at the small coin depots. 
 
The bank branches receive the banknotes and coins from the Currency Chests and Small Coin Depots for further distribution among the public. In order to facilitate the distribution of banknotes and rupee coins, the Reserve Bank has authorized select branches of scheduled banks to establish Currency Chests. These are actually storehouses where banknotes and rupee coins are stocked on behalf of the Reserve Bank. 
 
The Reserve Bank estimates the demand for banknotes on the basis of the growth rate of the economy, the replacement demand and reserve stock requirements by using statistical models/techniques. Apart from this, deficit financing by the government also constitutes printing of fresh currency. Since deficit financing is replaced by Monetized deficit in India since 1997, the monetized deficit constitutes increase in currency. Fresh currency issues through monetized deficit or deficit financing contains inflationary tendencies as it is not backed by the rise in GDP but is tool to finance the deficit in the government budget.
 
RBI cannot print currency indiscriminately and distribute among the poor and thus make them rich. If unlimited currency is printed by the RBI which is not commensurate with the growth of GDP, the amount of currency in the hands of the people will be much more than the capacity of economy to produce goods and services. 
 
This excess currency will create excess demand for goods and services, reduce the value of currency itself and thus will create the demand pull inflation. The demand pull inflation is also defined as ‘too much of money chasing small number of goods’. In the Second World War, Germany financed its war expenditure by printing fresh currency as a result, the country was gripped by the hyperinflation, devaluing the German currency to junk. Thus the currency management is a sensitive issue with cumbersome intricacies with long term impact on the economy.
 
On 11 April 2012, 13th high-power meeting of the Standing Committee on Currency Management (SCCM) for was held in Patna to discuss issues relating to currency management, including implementation of clean note policy, customer services, availability and retail distribution of notes and coins, detection-impounding-reporting of fake Indian currency notes and movement of treasure. SCCM is the apex forum in the state set up to bring together commercial banks and other government agencies on a common platform to discuss and sort out issues/challenges in areas of currency management, keeping in view the broad policy framework and customer satisfaction.
 
The currency printed by RBI is called as ‘fiat’ currency because it is not pegged or fixed to a mass of precious metal like gold. Extrinsic value of such currencies is much higher than their intrinsic value i.e. the cost of printing a 100 Rupee note is much lesser than 100 Rupee.
 
Today every country uses the fiat currency as a medium of exchange and in every country; there exist some preconditions in the form of reserves of foreign exchange or gold to print the currency. In India, Minimum Reserve system is followed which represents the minimum backing of Rs.200 crores by the Reserve bank of India. Out of which Rs.115 crores worth of gold and Rs.85 crores worth of foreign Securities are kept under RBI, the Monetary Authority of India.
 
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