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.