Currency System in India

                                                                                                               - Dr. S. Vijay Kumar

Every branch of knowledge has its fundamental discovery, in mechanics it is wheel, in science it is fire, in politics it is vote. Similarly, in economics it is the money which is the essential invention on which all rest is based.

Money as a means of payment consists of coins, paper money and withdrawable bank deposits. In India, the rupee and the half rupee coin are unlimited legal tender, while all other coins are limited legal tender up to Rs.10. Today, credit cards and electronic cash form an important component of the payment system. For a common person though, money simply means currency and coins. This is so because in India, the payment system, especially for retail transactions still revolves around currency and coins. The common man knows very little about the currency and coins he handles on a daily basis. Hence, this article.

The Indian currency is called the Indian Rupee (INR) and the coins are called paise. The Reserve Bank derives its role in currency management on the basis of the Reserve Bank of India Act, 1934. One Rupee consists of 100 paise. At present, notes in India are issued in the denomination of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000. These notes are called bank notes as they are issued by the Reserve Bank of India (Reserve Bank). All these notes are convertible into each other and are unlimited legal tender. The printing of notes in the denominations of Re.1 and Rs.2 has been discontinued as these denominations have been coinised. However, such notes issued earlier are still in circulation. The printing of notes in the denomination of Rs.5 had also been discontinued; however, it has been decided to reintroduce these notes so as to meet the gap between the demand and supply of coins in this denomination.

The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security features. The Reserve Bank estimates the quantity of notes that are likely to be needed denomination-wise and places the indent with the various presses through the Government of India. The notes received from the presses are issued and a reserve stock maintained. Notes received from banks and currency chests are examined. Notes fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of notes in circulation.

The responsibility for coinage vests with Government of India on the basis of the Coinage Act, 1906 as amended from time to time. The designing and minting of coins in various denominations is also attended to by the Government of India. The Government of India decides upon the quantity of coins to be minted. Coins in India are in denominations of 10 paise, 20 paise, 25 paise, 50 paise, one rupee, two rupees and five rupees. Coins up to 50 paise are called 'small coins' and coins of Rupee one and above are called 'Rupee Coins'. However, denominations of 10 paise, 20 paise, 25 paise are now discontinued, because of cost effectiveness.

The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements. The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models.

History of Currency System in India:

 

The history of the Indian rupee traces back to 6th century BC was one of the earliest issuers of coins in the world. Arthashasthram written by Chanikya, Prime Minister to the first Chandragupta Maurya (340-290 BC), mentioned about silver, gold, copper and lead coins. During his five-year rule from 1540 to 1545 CE Sher Shah Suri issued silver coins which was termed the Rupiya. The silver coin remained in use during the Mughal Period, Maratha era as well as in British India. Among the earliest issues of paper rupees include - the Bank of Hindustan (1770–1832), the General Bank of Bengal and Bihar (1773–75, established by Warren Hastings) and the Bengal Bank (1784–91).

India was unaffected by the imperial order-in-council of 1825, which attempted to introduce British sterling coinage to the British colonies. British India, at that time, was controlled by the British East India Company. The silver rupee continued as the currency of India through the British Raj and beyond. In 1835, British India adopted a mono-metallic silver standard based on the rupee; this decision was influenced by a letter written by Lord Liverpool in 1805 extolling the virtues of mono-metallic.

Following the Indian Mutiny in 1857, the British government took direct control of British India. Since 1851, gold sovereigns were produced en masseat the Royal Mint in Sydney, New South Wales. In an 1864 attempt to make the British gold sovereign the "imperial coin", the treasuries in Bombay and Calcutta were instructed to receive gold sovereigns; however, these gold sovereigns never left the vaults. As the British government gave up hope of replacing the rupee in India with the pound sterling, it realized for the same reason it could not replace the silver dollar in the Straits Settlements with the Indian rupee (as the British East India Company had desired).

Since the silver crisis of 1873, a number of nations adopted the gold standard; however, India remained on the silver standard until it was replaced by a basket of commodities and currencies in the late 20th century. The Indian rupee replaced the Danish Indian Rupee in 1845, the French Indian Rupee in 1954 and the Portuguese Indian escudo in 1961. Following the independence of British India in 1947 and the accession of the princely states to the new Union, the Indian rupee replaced all the currencies of the previously autonomous states (although the Hyderabadi Rupee was not demonetized until 1959). Some of the states had issued rupees equal to those issued by the British (such as the Travancore Rupee). Other currencies (including the Hyderabadi rupee and the Kutch kori) had different values.

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:

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 (When paise was introduced newly, paise were called as naya paise, naya means new). Later on 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.

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.

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. In 2008, total currency in circulation in India is 140.3 billion USD, 3.29%.

External Value of Rupee:

(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) 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. It was mostly at around Rs.45 against a dollar. It touched a high of Rs.39 in 2007. The Indian currency has gradually depreciated since the global 2008 economic crisis. To day (18-01-2014) the dollar value is Rs. 61.54. The reasons for these devaluations are CAD, Fiscal deficit, soaring inflation, insufficient foreign ex­change reserves, decontrol and liberalization. 

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.

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.

Liberalization of Exchange Rate:

Since 1992, in a phased manner, all exchange restrictions have been removed and Indian rupee has been made fully convertible on current account side (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. But, India still adopting partial convertibility of rupee on capital account side.

The Reserve Bank manages the currency operations through its offices located at Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Belapur(Navi Mumbai), Kolkata, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Lucknow, Mumbai (Fort), Nagpur, New Delhi, Patna and Thiruvananthapuram. These offices receive fresh notes from the note presses. Similarly, the Reserve Bank offices located at Kolkata, Hyderabad, Mumbai and New Delhi initially receive the coins from the mints. These offices then send them to the other offices of the Reserve Bank. The notes and rupee coins are stocked at the currency chests and small coins at the small coin depots. The bank branches receive the bank notes and coins from the currency chests and small coin depots for further distribution among the public.

To facilitate the distribution of notes and rupee coins, the Reserve Bank has authorized selected branches of banks to establish currency chests. These are actually storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank. At present, there are over 4422 currency chests. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.

Some bank branches are also authorized to establish small coin depots to stock small coins. There are 3784 small coin depots spread throughout the country. The small coin depots also distribute small coins to other bank branches in their area of operation.

General features of bank notes currently in circulation:
Rs.10, Rs.20, Rs.50 and Rs.100 notes issued earlier and which are still in circulation contain the Ashoka Pillar watermark and Ashoka Pillar effigy. The Rs.500 notes issued earlier i.e. since 1987 bear the Ashoka Pillar watermark and the Mahatma Gandhi portrait. The Reserve Bank is now issuing bank notes in Mahatma Gandhi series. This means that the notes contain Mahatma Gandhi watermark as well as Mahatma Gandhi's portrait. The Rs.5 notes re-introduced in August 2001 also bear the Ashoka Pillar watermark and Ashoka Pillar effigy. All these notes issued by the Bank are legal tender.

Languages written on Indian Currency Notes:

On any of Indian currency note, there are 17 languages including English and Hindi. The other 15 languages are 1. Assamese 2. Bengali 3. Gujarati 4. Kannada 5.Kashmiri 6. Konkani 7. Malayalam 8. Marathi 9. Nepali 10.Oriya 11.Punjabi 12.Sanskrit 13.Tamil 14.Telugu 15.Urdu. The amount and the word "rupee" is written on the front of Indian banknotes in English and Hindi, whilst on the back 15 other languages are written in English alphabetical order.

The new Mahatma Gandhi series of notes contain several special features vis-à-vis the notes issued earlier. These are:

1) Security thread: Rs.10, Rs.20 and Rs.50 notes contain a readable but fully embedded security windowed security thread. Rs.100, Rs.500 and Rs.1000 notes contain a readable windowed security thread. This thread is partially exposed and partially embedded. When held against light, this thread can be seen as one continuous line. Other than on Rs.1000 notes, this thread contains the words 'Bharat' in the devnagri script and 'RBI' appearing alternately. The security thread of the Rs.1000 note contains the inscription 'Bharat' in the devnagri script, '1000' and 'RBI'. Notes issued earlier have a plain, non-readable fully embedded security thread.

2) Latent Image: A vertical band behind on the right side of the Mahatma Gandhi’s portrait, which contains a latent image, showing the denominational value 20, 50, 100, 500 or 1000 as the case may be. The value can be seen only when the note is held on the palm and light allowed to fall on it at 45° ; otherwise this feature appears only as a vertical band.

3) Micro letterings: This feature appears between the vertical band and Mahatma Gandhi portrait. It contains the word ‘RBI’ in Rs.10. Notes of Rs.20 and above also contain the denominational value of the notes. This feature can be seen better under a magnifying glass.

4) Identification mark: A special intaglio feature has been introduced on the left of the watermark window on all notes except Rs.10/- note. This feature is in different shapes for various denominations (Rs.20-Vertical Rectangle, Rs.50-Square, Rs.100-Triangle, Rs.500-Circle, and Rs.1000-Diamond) and helps the visually impaired to identify the denomination.

5) Intaglio Printing: The portrait of Mahatma Gandhi, Reserve Bank seal, guarantee and promise clause, Ashoka Pillar Emblem on the left, RBI Governor's signature are printed in intaglio i.e. in raised prints in Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 notes.

6) Fluorescence: The number panels of the notes are printed in fluorescent ink. The notes also have optical fibers. Both can be seen when the notes are exposed to ultra-violet lamp.

7) Optically Variable Ink: The numeral 500 & 1000 on the Rs.500 [revised colour scheme of mild yellow, mauve and brown] and Rs.1000 notes are printed in Optically Variable Ink viz., a Colour-shifting ink. The colour of these numerals appears green when the notes are held flat but would change to blue when the notes are held at an angle.

Forgeries:

The notes on which the above features are not available can be suspected as forged notes and examined minutely.

Printing and circulation of forged notes are offences under Sections 489A to 489E of the Indian Penal Code and are punishable in the courts of law by fine or imprisonment or both, depending on the offence.

Facilities to the public for exchange of their soiled, mutilated etc. notes:

Soiled notes are those which have become dirty and slightly cut. Notes which have numbers on two ends, i.e. notes in the denomination of Rs.10 and above which are in two pieces, are also treated as soiled note. The cut in such notes, should, however, not have passed through the number panels. All these notes can be exchanged at the counters of any public sector bank branch, any currency chest branch of a private sector bank or any Issue Office of the Reserve Bank of India. There is no need to fill any form for doing this.

Mutilated Notes:

Notes which are in pieces and/or of which the essential portions are missing can also be exchanged. Essential portions in a currency note are name of issuing authority, guarantee, promise clause, signature, Ashoka Pillar emblem/portrait of Mahatma Gandhi, water mark. Refund value of these notes is, however, paid as per RBI(Note Refund) Rules. These can also be exchanged at the counters of any public sector bank branch, any currency chest branch of a private sector bank or any Issue Office of the RBI without filling any form.