Generally, the central bank of a country manages the currency of economy. In India RBI manages it with the advice of Government of India. The Reserve Bank derived its role in currency management on the basis of the Reserve Bank of India Act, 1934. 

 

Currency management essentially relates to issue of notes and coins and retrieval of unfit notes from circulation. This work is performed through 18 issue offices of the Reserve Bank and a wide network of 4195 currency chests, 488 repositories and 3562 small coin depots managed by banks and Government treasuries.

 

RBI has authorized selected branches of banks called Currency chests, to facilitate the distribution of notes and rupee coins. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation. 

 

Department of Currency Management (DCM) receives notes from four currency note printing presses. Two of the currency note printing presses are owned by the Government of India and two are owned by the Reserve Bank, through its wholly owned subsidiary, the Bharatiya Reserve Bank Note Mudran Ltd. (BRBNML). 

 

The government owned presses are at Nasik and Dewas. The other two presses are at Mysore and Salboni. Coins are minted in four mints owned by the Government of India. The mints are located at Mumbai, Hyderabad, Calcutta and Noida. 

 

As per the minimum storage method RBI can issue any amount of currency which is more than at least 200 crore gold and foreign currency. In this at-least 115 crore will be in the form of gold. 

 

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 by using statistical models/techniques. 

 

Notes and coins of all the denominations are issued by RBI except for the Rupee one coin because the Government of India derives authority to issue Rupee coins from the Coinage Act.

 

As such the rupee coins issued by Government constitute the liabilities of the Government. The Government of India decides the quantity of coins to be minted on the basis of indents received from the Reserve Bank.

 

RBI can print as much money as they want after considering the above mentioned facts. In fact, countries do resort to printing money, or what is known as Quantitative Easing, a term that became popular just after the recession. 

 

But, that measure is only for extreme situations, and is also considered dangerous because printing money causes inflation in an economy, too much printing of money will cause hyperinflation also. 

 

Printing money reduces the value of your currency. Inflation reduces the value of domestic securities making international investors leave the economy. Thus central bank cannot print any amount of money and distribute among poor to make them rich. If the overall supply of goods and services is not commensurate to the money supply increased, price of products will rise by the amount of extra currency printed. 

 

If that money is used for financing imports, the domestic currency will depreciate in the foreign exchange market. During slowdown, banks do resort to infusing fresh currency, but such techniques in normal will adversely affect the economy. Since currency in today’s world is not backed by the gold, its effect will be more drastic on the economy. Thus, there is no such thing as a free meal and printing money doesn’t have any effect on increasing real output / real income.  

 

Update your GK and read General Awareness Topics at MBA Rendezvous