Present Currency System in India

The present currency system in India (i.e., after World War II) is managed by the Reserve
Bank of India and is based on inconvertible paper currency system. It has two aspects: (a)
internal aspect, and (b) external aspect.
The internal aspect deals with the circulation of coins and currency notes, while the external
aspect deals with the external value of currency and the way it is regulated. The main features
of the present currency system in India are given below:
1. Coins:
The main developments in Indian coins, particularly after independence, are as follows:
(i) The Indian rupee coin is a token coin and is made of nickel. Up to 1940, the rupee was the
silver rupee weighing 118 grains and 11/12th fine.
In 1940, two developments took place: (a) one rupee note was issued; and (b) the silver
content was reduced from 11/12 to 1/2 fineness. In 1943, two rupee note was added to meet
the growing demand for rupees. The nickel rupee coin came into being in 1947.
(ii) Before 1957, only traditional coins were in circulation. These coins were one rupee, 8
annas (or half rupee), 4 annas (or quarter rupee), 2 annas, 1 anna, 1/2 anna, 1 paisa, and 1 pie.
The relationship between these coins was as follows 1 rupee = 16 annas = 64 paise = 192
pies.
(iii) From April 1, 1957, decimal coins system was introduced in India. Under this system,
the Indian rupee was divided into 100 naya paise. The nomenclature of naya paisa has now
been changed to simply paise.
To start with old coins remained in circulation along with new coins, but with effect from
January 1,1964, old coins ceased to be legal tender. All accounts are now kept in terms of
rupees and paise.
(iv)These coins are token coins and their face value is higher than their intrinsic (metallic)
value. One rupee coin, one rupee note and the coins of lower denomination are issued by the
Ministry of Finance, Government of India.
The rupee and the half rupee coin are unlimited legal tender, while all other coins are limited
legal tender up to Rs.10. At present, the coins of the denominations of 1,2,3,5,10,20,50 and
100 paise are in circulation.
2. Currency Notes:
With the exception of one-rupee notes, all other notes are issued by the Reserve Bank of
India. The Reserve Bank of India maintains a separate Issue Department which deals with
issuing of the currency notes. At present, notes of rupees 2, 5, 10, 50,100 and 500
denominations are in circulation. All these notes are convertible into each other and are
unlimited legal tender.
3. System of Notes Issue:
Originally, the Reserve Bank of India Act 1934 provided for the proportional reserve system
of note issue. According to this system, the Reserve Bank had to maintain not less than 40%
reserves (against note issue) in gold coins, bullion, and foreign securities with the provision
that gold coins and bullion were not at any time to be less than Rs. 40 crores.
The remaining 60% of the reserves were to be covered by rupee coins, rupee securities of
Government of India, approved bills of exchange and promissory notes payable in India.
After independence, with the introduction of economic planning, it was felt that the
proportional reserve system was not adequately elastic to meet the developmental needs of
the country.
In the beginning of Second Five Year Plan, India had to face foreign exchange difficulties. Its
foreign exchange reserves fell from Rs. 950 crores in 1950-51 to Rs. 825 crores in 1955-56.
Consequently, the Reserve Bank of India Act was amended in 1956 and the proportional
system of note issue was replaced by the minimum reserve system.
According to this amendment, the Issue Department of the Reserve Bank was required to
keep a minimum of Rs. 400 crores of foreign securities and Rs. 115 crores in gold coins and
bullion.

In November 1957, the Reserve Bank of India

Act was again amended to reduce the
minimum currency reserve in foreign
securities. Under the second amendment, the
value of overall minimum reserve to be
maintained by the Reserve Bank is Rs. 200
cores, of which not less than Rs 115 crores
should be kept in gold coins and bullion.
Thus, the present system of issuing notes in
India is based on the minimum reserve
method. The chief merit of this system is that
it is perfectly elastic; supply can be increased
up to any limit. But, there is also the danger of
over-issue and inflation under such a purely
managed system.
4. Expansion of Indian Currency:
There has been a continuous expansion of Indian Currency since independence. The main
reason for this expansion is deficit financing to meet the growing needs of money supply
during the planning period.
Total currency is circulation (i.e., notes in circulation plus circulation of rupee coins plus
circulation of small coins) has increased from Rs. 4553 crores in 1970-71 to Rs. 48601 crores
in 1989-90.
Of this total currency, notes in circulation increased from Rs. 4169 crores in 1970-71 to Rs.
47046 crores in 1989-90, circulation of rupee coins from Rs. 247 crores to Rs. 916 crores and
circulation of small coins from Rs.137 crores to Rs. 639 crores. In 1989-90, notes accounted
for 96.8%, rupee coins 1.9% and small coins 1.3% of the total currency in circulation.
5. External Value of Rupee:
The important developments as regard to the external value of rupee given on the next page:
(i) Prior to the establishment of the International Monetary Fund (IMF), India had the sterling
exchange standard and the Reserve Bank maintained the external value of rupee in terms of
sterling at the rate 1 Rupee = Is. 6d.
(ii)From March 1, 1947, India became the member of the IMF. Every member of the IMF has
to declare the parity value of its currency in terms of gold (or U.S. dollar). India fixed the
value of I Rupee = 0.268601 gram of fine gold (or 30.23 cents in terms of the U. S. dollar) in
1947. But this gold parity was such that the old rate of Is. 6d was maintained.
(iii)Despite India's membership of the IMF, the rupee's link with the pound sterling
continued. This link was considered beneficial for India because about 30% of India's trade
was with the sterling block and the exchange rate of rupee in terms of pound was helpful in
maintaining the competitive position of India's exports.
(iv)In September 1949, the rupee was devalued by 30.5% following the devaluation of pound.
New gold parity was declared as 1 Rupee = 0.186621 grams (or 1 Rupee = 21.00 U. S. cents).
(v) Indian rupee was further devalued on June 6, 1966 to the extent of 36.5% and the new
gold parity rate was fixed at 1 Rupee = 0.118489(or 1 Rupee = 13.33 U. S. cents.). This time,
the devaluation was necessitated by the balance of payments difficulties faced by India.
(vi)In September 1975, Indian rupee was delinked from pound sterling. Since then, the
external value of the rupee is expressed in terms of a basket of selected currencies and
fluctuates according to the market forces.
(vii) In a recent attempt to deal with the grave balance of payments crisis facing the country,
the Reserve Bank of India, in two stages, i.e., on July 1 and 3, 1991, devalued Indian rupee
by 8.97 % to 10.15% and 10.58% to 12.31 % respectively against the four major world
currencies, i:e. the U. S. dollar, the pound sterling, the Deutsch mark and the Japanese yen.
Thus, together the devaluation in two phases worked out to be more than 20%. Consequently,
the dollar increases in value in terms of Indian rupee from Rs. 21.14 to Rs. 25.88; the pound
from Rs. 34.36 to Rs. 41.50; the mark from Rs.11.75 to Rs. 14.10; and the yen from 15.22
paise to 1862.
 The broad policy goals of devaluation were (a) to boost Indian exports, (b) to reduce Indian
imports, (c) to encourage import substitution and (d) to check the flight of capital from the
country.
6. Exchange Control:
Exchange control was introduced in India during the World war II. But, even after
independence, the policy of strict exchange control continued. The shortage of foreign
exchange and the need for the same necessitated the adoption of this measure.
The purpose of exchange control after independence was to conserve country's foreign
exchange resources and to permit their proper use for the country's economic development.
Under the system of exchange control, all foreign exchange payments are to be made through
the Reserve Bank of India; exporters must surrender all foreign exchange earnings to the RBI
in exchange for Indian currency; imports are strictly restricted and foreign exchange is made
available to the selected importers through rationing.
7. Liberalisation of Exchange Rate:
Since 1992, in a phased manner, all exchange restrictions have been removed and Indian
rupee has been made fully convertible, (a) In 1992-93, partial convertibility of rupee was
introduced through Liberal Exchange rate Mechanism System (LERMS). (b) In 1993-94,
convertibility of rupee on trade account was introduced, (c) In 1994-95 current account
convertibility was announced.

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How Currency is Issued in India?

 In India, the paper currency was first issued during British East India Company rule. The first
paper notes were issued by the private banks such as Bank of Hindustan and the presidency banks
during late 18th century. Via the Paper Currency Act of 1861, the British Government of India
was conferred the monopoly to issue paper notes in India.

After this act, the government of India entered into agreements with the Presidency Banks to
work as authorized agents to promote circulations of the paper notes across length and breadth of
British India. But since India is a vast country, redemption of these notes became a issue soon.
Consequently, some “Currency Circles” came up in various parts of country where the paper
notes of Indian government were legal tenders.

In 1867, the agreements with the presidency banks were terminated. The job of promoting,
circulating and redemption of the currency notes was entrusted to Mint Masters, Accountant
General and the Controller of Currency. This practice continued till RBI came into existence in
1935.

Section 22 of the RBI Act 1934 makes provided that RBI has the sole right to issue Bank notes of
all denominations. Thus, Reserve Bank is responsible for the design, production and overall
management of the nation’s currency, with the goal of ensuring an adequate supply of clean and
genuine notes. In consultation with the Government, the Reserve Bank routinely addresses
security issues and targets ways to enhance security features to reduce the risk of counterfeiting
or forgery of currency notes.

Key Landmarks:

 1935 : Currency Function moved from Controller of currency to RBI

 1957 : Decimalization of coinage
 1995 : RBI sets up printing Press
 2000 : RBI mechanizes the currency processing
 2005 : RBI introduces Machine-readable security features
Contents [hide]
 Paper Currency Notes
 Issue Department and Currency Department
 Issue of Coins
 Proportional Reserve System v/s Minimum Reserve System
 Currency Chests
 Locations of Note Printing Presses:
 Coins and notes as Legal Tenders:
 Star Series Notes
 Languages on Currency Notes

Paper Currency Notes

At present, paper currency notes in India are issued in the denomination of Rs. 5, Rs.10, Rs.20,
Rs.50, Rs.100, Rs.500 and Rs.1,000. The printing of Rs. 1 and Rs. 2 denominations has been
discontinued, though the notes in circulation are valid. Reserve Bank of India has been authorized
to issue notes of Rs. 5000 and Rs. 10000 also. In fact, as per RBI act, RBI can issue any note of
any denomination but NOT exceeding Rs. 10,000. The notes denomination is notified by
Government and RBI acts accordingly.
Issue Department and Currency Department

RBI has a separate department called issue department whose assets and liabilities are kept
separate from the Banking Department. Currency Management function of Reserve Bank is
carried out at the “Department of Currency Management” located at Central Office Mumbai.
There are 19 Issue offices. RBI authorizes selected branches of Banks to establish Currency
Chests and Coin Deposits. At present there is a network of 4281 Curency Chests and 4044 Small
Coin Deposits.
Issue of Coins

The distribution of Coins is undertaken by RBI as an agent of the Government, (coins are minted
by the Government and not by RBI). Coins up to 50 paisa are called “small coins” and coins of
Rupee one and above are called “Rupee coins”.
Proportional Reserve System v/s Minimum Reserve System

Originally, the assets of the Issue department were to consist of not less than 2/5th of the Gold or
sterling securities, provided Gold was not less than Rs. 40 Crores in value. Remaining 3/5th of
the assets might be rupee coins. This was called “Proportional Reserve System”. In 1956, this
system was changed. Now, RBI is required to maintain a Gold and Foreign Exchange Reserves of
Rs. 200 Crore of which at least Rs. 115 Crore should be in Gold. This is called Minimum
Reserve System. This system continues till date.
Currency Chests

Currency chests are storehouses where bank notes and rupee coins are stocked on behalf of
the Reserve Bank. The currency chests have been established with State Bank of India, six
associate banks, nationalized banks, private sector banks, a foreign bank, a state
cooperative bank and a regional rural bank.

Deposits into the currency chest are treated as reserves with the Reserve Bank and are
included in the Cash Reserve Ratio.
Locations of Note Printing Presses:

The Security Printing and Minting Corporation of India Limited (SPMCIL) prints the notes.
It is a wholly owned company of the Government of India. Its printing presses are located at
Nasik (Maharashtra) and Dewas (Madhya Pradesh). Apart from that, the Bharatiya Reserve
Bank Note Mudran Pvt. Ltd. (BRBNMPL), a wholly owned subsidiary of the Reserve Bank,
also has set up printing presses. The presses of BRBNMPL are located at Mysore in Karnataka
and Salboni in West Bengal.

Security Printing and Minting Corporation of India Limited (SPMCIL) has 4 mints for coin
production located at Mumbai, Noida, Kolkata and Hyderabad.
Coins and notes as Legal Tenders:

One Rupee Note and One Rupee coins are legal tenders for unlimited amounts. 50 Paisa coins
are legal tender for any sum not above Rs. 10. The coins of smaller than 50 paisa value are legal
tenders of a sum below Re. 1.
Star Series Notes
The Star series notes are currently issued in Rs. 10, 20, 50 and Rs. 100. These notes are issued to
replace the defected printed notes at the printing press. They have an additional character of a star
and the bundles are NOT in series. Rest all the features are same.
Languages on Currency Notes

The amount of a banknote is written on it in 17 languages out of 22 official languages of India.

The languages are Assamese, Bengali, Gujarati, Kannada, Kashmiri, Konkani, Malayalam,
Marathi, Nepali, Oriya, Punjabi, Sanskrit, Tamil, Telugu and Urdu.

Last Updated: June 16, 2015

Tags:British East India Company , Coins in India , Currency in India , Indian Languages , Reserve Bank of India