an in in ndia      12.31
     credit to the government and to the commercial              The RBI issues currency notes of rupees 2, 5,
     sector. These two together accounted for nearly       10, 20, 50, 100, and 2000 denominations which
     100 per cent of the broad money in 2012–13,           RBI calls as the ‘Reserve Money’. The RBI issues
     compared to 89 per cent in 2009–10.                   currency of one rupee notes and coins including
                                                           coins of smaller denominations on behalf of the
     high PoWer money                                      Government of India which accounts for around
     The central banks of all the countries are empowered  2 per cent of the total high power money.
     to issue the currency. The currency issued by the
     central bank is called ‘high power money’ because     minimum reserve
     it is generally backed by supporting ‘reserves’ and   The RBI is required to maintain a reserve
     its value is guaranteed by the government and         equivalent of Rs. 200 crores in gold and foreign
     it is the source of all other forms of money. The     currency with itself, of which Rs. 115 crores
     currency issued by the central bank is, in fact, is a should be in gold. Against this reserve, the RBI is
     liability of the central bank and the government. In  empowered to issue currency to any extent. This
     general, therefore, this liability must be backed by  is being followed since 1957 and is known as the
     an equal value of assets consisting mainly, gold and  Minimum Reserve System (MRS).
     foreign exchange reserves. In practice, however,
                                                           reserve money
     most countries# have adopted a ‘minimum reserve
     system’.                                              The gross amount of the following six segments of
                                                           money at any point of time is known as Reserve
           Under the minimum reserve system the central
                                                           Money (RM) for the economy or the government:
     bank is required to keep a certain minimum
     ‘reserve of gold and foreign securities and is              (i) RBI’s net credit to the Government;
     empowered to issue currency to any extent. India           (ii) RBI’s net credit to the Banks;
     adopted this system in October 1956. The RBI              (iii) RBI’s net credit to the commercial banks;
     was required to hold a reserve worth of only Rs           (iv) net forex reserve with the RBI;
     515 crore consisting of foreign securities worth Rs        (v) government’s currency liabilities to the
     400 crore and gold worth Rs 115 crore. In 1957,                 public;
     however, the minimum reserves were further                (vi) net non-monetary liabilities of the RBI.
     reduced to only gold reserve of Rs 115 crore and                RM = 1 + 2 + 3 + 4 + 5 + 6
     the rest in the form of rupee securities, mainly due
                                                                 As per the Economic Survey 2014–15, the rate
     to the scarcity of foreign exchange to meet essential
                                                           of growth of reserve money comprising currency
     import bill. A gold reserve of Rs. 115 crore against
                                                           in circulation and deposits with the RBI (bankers
     the currency of Rs. 17,00,000 crore in circulation
                                                           and others) decelerated from an average of 17.8
     today, makes only 0.7 per cent reserve which is of    per cent in 2014–15 to 4.3 per cent in 2013–14.
     no consequence. This makes the Indian currency        Almost the entire increase in the reserve money
     system a ‘managed paper currency system’. In          of Rs. 3.258 billion between the period consisted
     India, there are two sources of high power money      of increase in currency in circulation. As sources of
     supply:                                               reserve money, net RBI credit to the government
           (i) RBI; and                                    and increase in net financial assets of the RBI
          (ii) Government of India.                        contributed to the growth of base money.