STD = X
ROLL NO = 43
Money is a token or item which acts as a medium of exchange that has both legal
and social acceptance with regards to making payment for buying commodities or
receiving services, as well as repayment of loans.
Types of Money – Commodity money, Representative money, Fiat money,
Commercial Bank money.
Store of value
Medium of exchange
Standard of payments
Currency refers to physical objects generally accepted as a medium of exchange.
These are usually the coins and banknotes of a particular government, which
comprise the physical aspects of a nation's money supply.
Currency has value only by government order. The government declares the fiat to be
legal tender, making it unlawful to not accept the fiat currency as a means of
repayment for all debts, public and private.
The Reserve Bank of India defines the monetary aggregates as
Reserve Money (M0) : Currency in circulation + Bankers’ deposits with
RBI + other deposits with RBI = Net RBI Credit to the Govt. + RBI
Credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign
assets + Govt.’s currency liabilities to the public – RBI’s net non-monetary
M1 : Currency with the public + Deposit money of the public (Demand
deposits with the banking system + Other deposits with the RBI)
M2 : M1 + Savings deposits with post office savings banks
M3 : M1 + Time deposits with the banking system = Net bank credit to
the Govt. + Bank credit to the commercial sector + Net foreign exchange
assets of the banking system + Govt.’s currency liabilities to the public - Net
non-monetary liabilities of the banking sector (Other than time deposits).
M4 : M3 + All deposits with savings bank post offices (excluding NSCs)
Chest Branches & RBI
Mint linked offices
In India, RBI in Conjunction with finance ministry decides how much money
should be printed.
Printing of Paper currency is the responsibility of RBI as per the Reserve Bank of
India Act, 1934.
The responsibility for Coinage vests with Government of India on the basis of the
Coinage Act, 1906
Factors Affecting Printing of Money
Usually RBI estimates the need for printing of money based on the below factors :
Statistical Analysis and other Demand forecast techniques
Two methods are followed :
I Method : Demand is estimated based on the below factors
-- Income or its proxy
-- Price levels
-- Opportunity Cost of holding cash
Here the problem is income levels are usually not available beyond quarterly
II Method : Univariate time series analysis
Future demands in currency levels are estimated using historical growth rates of
currency demand. Statistical and other forecasting techniques are used.
Though the method can be applied to any frequencies, the main problem with high
frequencies is the specification of intra-month variation in demand levels which
change from month to month and hence is difficult to estimate with precision
I -Payment Habits of the economy
Significant amount of wages and salaries in India is paid ( in cash ) at the beginning
of every month. Therefore, currency in circulation increases at the beginning of a
month. As the public buys goods and services with them, the currency first flows to
the corporate sector and from there to the banking sector.
II -Spending Habits of the public
Currency demand in India typically follows a V-shape pattern. The demand for
currency is high during April–June, bottoms out during July–September and picks
up again during October–March.
The high currency demand during April–June emanates from the realization of
proceeds from the wheat harvest. The entire quantum of wheat procurement in
India takes place during this period. On the other hand, the high transactions
demand during October–March is because of festivals, rice procurement and pickup in agro-based industrial activities.
The bank note printing in India started in 1928 with the establishment of India
Security Press at Nashik by Government of India.
Until the commissioning of Nashik Press the Indian Currency Notes were got
printed from Thomas De La Rue Giori of United Kingdom.
The second bank note printing press was established in Dewas (Madhya Pradesh) in
1975 by Government of India.
With the growth in population and economic activity, the demand for bank notes
has been steadily increasing. To bridge the demand and supply gap, the Government
of India decided to establish two new bank note printing presses one at Mysore
(Karnataka) and the other at Salboni (West Bengal)
Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) was
established by Reserve Bank of India (RBI) as its wholly owned subsidiary on 3rd
February 1995 with a view to augmenting the production of bank notes in India to
enable the RBI to bridge the gap between the supply and demand for bank notes in
The BRBNMPL has been registered as a Private Limited Company under the
Companies Act 1956 with its Registered and Corporate Office situated at
The company manages 2 Presses one at Mysore in Karnataka and the other at
Salboni in West Bengal. The present capacity for both the presses is 16 billion note
pieces per year on a 2-shift basis.
Total Annual capacity of the presses currently is 18 billion pieces
Can produce up to 28 billion pieces in two shifts.
Total minting capacity is 4700 million.
RBI’s annual requirements are usually 12000 million notes and 5000 million coins.
There is a gap in the demand supply of coins in the country since 1990s.
Initially Indian currency was based on silver.
Later on, towards the end of the British Rule, India shifted to Gold standard.
Currently the Reserve Bank decides upon the volume and value of bank notes to be
printed based 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
Also, contrary to public view, currency cannot be exchanged for Gold from RBI.
The Reserve Bank will not pay gold in any circumstances in exchange for currency.
Most of the economies in the world have done away with the Gold standard.
Monetary policy is the process by which the central bank of a country controls the
supply of money in its economy by exercising its control over interest rates in order
to maintain price stability and to achieve high economic growth.
Controlled expansion of credit
Promotion of investment
Desired distribution of credit
Equitable distribution of credit
Open Market Operations
An open market operation is an instrument of monetary policy which involves
buying or selling of government securities from or to the public and banks
Cash Reserve ratio
Cash Reserve Ratio is a certain percentage of bank deposits which banks are required
to keep with RBI in the form of reserves or balances
Statutory liquidity ratio
Every financial institute have to maintain a certain amount of liquid assets from their
time and demand liabilities with the RBI. These liquid assets can be cash, precious
metals, approved securities like bonds etc. The ratio of the liquid assets to time and
demand liabilities is termed as Statutory Liquidity Ratio.
Bank rate policy
Bank rate is the rate of interest charged by the RBI for providing funds
or loans to the banking system.
RBI issues prior information or direction to the banking system that
loans should be given up to a certain limit
Repo rate is the rate at which RBI lends to commercial banks generally
against government securities.
Reverse Repo rate
It is the rate which the RBI pays to the banks for depositing their surplus money.
Growth of an economy increases the standard of living and the income levels of the
public. Hence the spending also increases.
As there is more and more money in circulation, the price levels of commodities
increase and in turn, the value of the currency falls. This is because there is more
amount of money in the system than is demanded. This phenomenon is called
RBI will check this situation through its monetary policy by increasing the lending
rates and thus reducing the easy availability of money in the system. This will help
check the fall in value of the money.
However ,this will reduce the credit availability and hence the industrial output
decreases and as a result the economy slows down. GDP will fall.
When the inflationary situation is under control, then RBI will reduce the interest
rates, which in turn increases the credit availability and hence powers the economy.
Hence Money supply, Inflation, Interest rates and the GDP form a critical sequence
of macro economic environment of a country.
Allegations about involvement of ISI, Pakistan and other
anti social elements.
RBI Estimates of Fake notes of about 3 to 6 pieces per
Fake currency operators in Dubai search the laborers from
India who are in need of money to return to India and are made
to carry the packages with fake currency.
Sending photo albums packed neatly with Indian fake
currency and sealed with polythene bags.
• The law enforcing agencies such as Customs, Immigrations and
Airport Security Authorities help to keep check.
Identifying and keeping watch on suspicious people frequently
visiting to countries such as UAE, Nepal etc.
Installation of note sorting machine in phased manner at banks.
As per the recommendations from RBI Committee, the promotion
of use of electronic means and plastic cards is under consideration.
Security features are constantly upgraded and educating public to
identify fake notes.
1. Money is unreal, imaginary and intangible.
2. Money must only represent the value of human labor (including
services) and the natural resources.
3. Currency is printed, not money.
4. Currency is not money, but merely represents money.
5. Money is created, not printed.
How much one currency is worth in terms of another currency.
India has Floating Exchange Rate System.
Rupee Appreciation Currency gaining Strength.
Rupee Depreciation Currency getting weaker.
Factors causing fluctuation
- Interest Rate
- Inflation Rate
- Export-Import imbalances
- Trading in currencies in the Forex market
Economy : Economy strengthens with appreciation of rupee and vice versa.
Foreign Investors : Foreign Investors earn profit on investments with
appreciation of rupee and vice versa.