Indian Currency System

  • In a modern economy, money consists mainly of currency notes and coins issued by the monetary authority of the country.
  • In India currency notes are issued by the Reserve Bank of India (RBI), which is the monetary authority in India. RBI Act 1934 empowers RBI to issue all the banknotes except 1 Rs. note.
  • However, coins and 1 Rs. notes are issued by the Government of India under the coinage act 1909.
  • Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since cheques drawn on these accounts are used to settle transactions. Such deposits are called demand deposits as they are payable by the bank on demand from the account-holder. Other deposits, e.g. fixed deposits, have a fixed period to maturity and are referred to as time deposits.
  • The value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these items. Every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI or any other commercial bank, RBI will be responsible for giving the person purchasing power equal to the value printed on the note. The same is also true of coins.UPSC Prelims 2024 dynamic test series
  • Currency notes and coins are therefore called fiat money (backed by the government). They do not have intrinsic value like gold or silver coin. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction. Cheques drawn on savings or current accounts can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders.
  • RBI is also empowered to make a recommendation to government of India to withdraw any notes from circulation. This is known as demonetisation.

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