Short Essay on the Present Currency System in India

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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:

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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.

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(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.

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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.

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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.

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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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