The present regulation of note issue

2.  RBI being the central bank of the country, its main
function is to control the currency system in
accordance with the economic policy of the
government.
 RBI uses its monetary policy as an effective tool for
economic stability and economic growth in India.
 In India the main unit of money is known as “Rupee”
and the smallest unit of money is known as “Paisa”.

3.  India is the member of the International Monetary Fund Organization and
hence for the conversion into foreign currency Rupee is considered to be
the converting tool.
 At present, bank notes in India are issued in the denomination of Rs.5
Rs.10, Rs.20, Rs.50, Rs.100, Rs.500, Rs.1000, Rs.5000. These notes are
called bank notes as they are issued by the Reserve Bank of India and
signed by the governor of the reserve bank.
 The Reserve Bank can also issue bank notes in the denominations of five
thousand rupees and ten thousand rupees, or any other denomination that
the Central Government may specify. There cannot, though, be bank notes
in denominations higher than ten thousand rupees in terms of the current
provisions of the Reserve Bank of India of Act, 1934. Coins can be issued
up to the denomination of Rs.1000.

4.  In terms of Section 25 of RBI Act, 1934 the design of bank notes is
required to be approved by the Central Government on the
recommendations of the Central Board of the Reserve Bank of India.
 As required by the RBI, Act, 1934 The Reserve Bank maintains two
departments i.e. issue department and bank department.
Issue Department: The issue department is responsible for the issue of notes
and these notes are its liability. The assets of the issue
department against which bank notes are issued consist of the
following:
 Gold coins and bullion
 Foreign Securities
 Rupee Coins
 Government of India rupee securities
 Credit papers

5.  The issue department of the bank alone can issue notes.
 The assets of the issue department should be completely
separate from the banking department of the Reserve Bank.
 All the notes issued by the Reserve Bank are legal tender and
are guaranteed by the central government.
 RBI should have the prior approval of the central government
regarding the decision and material of the notes issued.
 The central government has its power to demonetize any
series of the notes issued by RBI.
 No stamp duty is payable by the Reserve Bank in respect of
notes, issued by it.

6.  Proportion means a part, percentage or share of
something regarded as a collective whole.
 Reserve implies something valuable stocked up
systematically or stored carefully often on a large
scale at a secured location.
 A System comprises a set of detailed procedures,
routines, and methods that are supposed to be
followed to perform certain activities.

7. In Proportional Reserve System (PRS), certain
proportion or percentage of the reserves has to
maintained in the form of precious metals like
Gold. The remaining part of the reserves is to be
kept in specific assets such as Government
Securities and Commercial Bills. Such a balance
is maintained to give backing (support) to the
total volume of currency notes issued by the apex
central bank of a nation like RBI in India.

8.  India followed Proportional Reserve System of note issue
between 1935 and 1956.
 The original RBI Act of 1934 had a provision that mentioned
the issuance of currency notes must be according to the
Proportional Reserve System.
 The original act required RBI to maintain 40% of reserves in
Gold for backing the issue of currency notes in India.
 On 6th October 1956, RBI replaced PRS with another method
of note issue called ‘Minimum Reserve System.’ This step
was taken to enable and fulfill the expanding currency needs
of the Indian economy.

9.  Precious metals remained locked in vaults of reserves, and
their productive use hindered. It was a waste of valuable
metallic resources.
 This system adversely affects the economy an excessive
supply of money in the economy cause to create certain
economic problems.
 Excessive money cause to decrease the purchasing power of
the currency, which badly affect the common man.
 Though it was easy to expand (increase) the money supply, it
was difficult to contract (decrease) supply of paper notes in
case the reserves fell.

10. Since 1957, the Issue Department is maintaining minimum
reserve system where it maintains a minimum reserve of gold
and foreign securities to the extent of Rs. 200 crore of which
the gold reserve should be of minimum value not less than Rs.
115 crore.

11.  This system is much elastic which can meet
the ever-changing needs of the money by
the govt.
 Because a fixed amount of gold, silver or
foreign exchange is to be maintained as
fixed minimum reserve, therefore it becomes
much economical and government can also
change the fixed minimum reserve at
anytime.

12.  Under this method, there is a danger of
excessive note issue, which consequently
brings inflation. This inflation adversely
affects the economy.
 An excessive note issue cause to decrease.
in the currency value this decrease in the
value of currency cause to contract the
purchasing power of the consumers.

13.  The central banks are required by law to keep
gold and foreign securities against the issue of
currency notes. Under the proportional reserve
system, the amount of gold and foreign securities
bears a fixed proportion, between 25 to 40% of
the total notes issued .Under the minimum
reserve system on the other hand, a minimum
fixed amount of gold and foreign securities is
kept against note issue by the central bank.

14.  In the proportional reserve system additional
notes can be issued only by increasing the
reserve of gold and foreign securities in the fixed
proportion. In the minimum reserve system,
notes can be issued in any amount after keeping
the minimum reserve of gold and foreign
securities

15.  Soiled Notes: means a note which, has become dirty due to
usage and also includes a two piece note pasted together
wherein both the pieces presented belong to the same note,
and form the entire note.
 Mutilated bank note: It is a banknote, of which a portion
is missing or which is composed of more than two pieces.
 Imperfect banknote: It means any banknote, which is
wholly or partially, obliterated, shrunk, washed, altered or
indecipherable but does not include a mutilated banknote.

16. As the currency authority, the RBI provides
different denominations of currency notes for
facilitating the transactions of central and
state governments and caters to the
exchange and remittance needs of the public
banks as well as the government
departments.

18.  Currency chests are storehouses where bank notes
and rupee coins are stocked on behalf of the Reserve
Bank. Currency management infrastructure consists
of a network of 19 issue offices, 4,132 currency
chests (including sub-treasury offices and a currency
chest of the Reserve Bank at Kochi) and 3,813 small
coin depots of commercial, co-operative and regional
rural banks spread across the country.

19.  The life of the paper used in the preparation of currency is short and hence
the proportion of the coins in circulation has been increased to a large
extent.
 For the distribution of coins the services of post-offices, railways, road
transport etc are being used and above the services rendered by the banks.
 Steps for introducing new currency notes in the market or withdrawal of
old coins are taken by RBI.
 For testing the currency notes, RBI has introduced “Currency Verification
and Processing System” in its 18 offices using such 48 (CVP) systems in
the country.
 This system classifies the currency notes into issuable, non-issuable and
reject able.

20. Demand for currency is estimated using
econometric models inter alia, factoring in real
GDP growth prospects, rate of inflation and
disposal rate of soiled notes denomination-wise.
Accordingly, the total supply of banknotes was
raised to 23.7 billion in 2014-15 from 20.9
billion pieces (an increase of 13.1 per cent) in
2013-14. Coins was also increased by 3.0 per
cent in 2014-15 as compared to 11.6 per cent in
2013-14.

21. The main precautionary steps for cleanliness of the
notes can be counted as follows:
1. The packages of the currency notes should not
be stapled by the pins.
2. The new notes should be provided to the banks
for issue.
3. The torn notes should be withdrawn from the
circulation.
4. The speed of mechanized processing of notes in
the offices of RBI should be increased.

23.  During 2014-15, 594,446 pieces of
counterfeit notes were detected in the
banking system, of which 95.6 per cent were
detected by commercial banks, while 4.4 per
cent were detected at the Reserve Bank
offices.
 2014-15, the number of counterfeit notes
detected increased for all denominations
except `2 and `5.

24.  For printing currency notes, the RBI has established its
completely associated printing press known as RBI Printing
(Press) Private Limited.
 This establishment of RBI has two press situated one at
Mysore (Karnataka) and other at Salbony (W. Bengal).
 Based on the orders issued by the govt. and RBI , these two
press print the currency notes as per the designs and qualities
of the papers approved by these two authorities, and make
delivery of the notes to RBI.
 This printing press institution has been confirmed by the ISO-
9001 certificate which is considered to be the first institution
of the world.

25. Objective of demonetization measure of
January 1978 was the aim of
demonetization of high denominations
currency was to prevent illegal transactions
carried on.