RBI's Currency Management Function

Currency management is the work of deciding how many notes and coins a country needs, getting them printed or minted, sending them across the country, keeping them clean and genuine, and taking back old or damaged ones. In India, the Reserve Bank of India does this for banknotes, while the Government of India is responsible for coins and the ₹1 note. The aim is that every person can get enough good-quality, genuine cash, in the denominations they need, whenever they need it.

Why does it matter?

Cash is still used for a large share of daily purchases in India, especially in villages and the informal economy. If there is too little cash, trade stops, as seen in late 2016. If there is too much, or if notes are dirty or fake, people lose trust in money. Think of the RBI as the country's "cash shopkeeper": it must keep the right stock of every note size on the shelf, replace torn stock and keep fake goods out.

Where does the RBI's power come from?

The RBI Act, 1934 (the RBI started work in 1935) gives the legal base:

• Section 22: The RBI has the sole right to issue banknotes in India.
• Section 23: Note issue is handled by a separate Issue Department of the RBI.
• Section 24: Notes can be issued in denominations decided by the central government on the RBI's recommendation, up to a maximum of ₹10,000.
• Section 25: The design, form and material of notes are approved by the central government after considering the recommendation of the RBI's Central Board.
• Section 26(1): Every RBI banknote is legal tender, and its value is guaranteed by the central government. That is why each note carries the line "I promise to pay the bearer..." signed by the RBI Governor.
• Section 26(2): The central government, on the recommendation of the RBI's Central Board, may declare any series of notes as no longer legal tender. This was the power used in 2016.

Who does what?

• RBI: issues all banknotes from ₹2 upwards and puts coins into circulation.
• Government of India: issues the ₹1 note (signed by the Finance Secretary, not the Governor) and designs and mints coins under the Coinage Act, 2011.
• Note printing presses (four): Nashik (Maharashtra) and Dewas (Madhya Pradesh) belong to the government-owned Security Printing and Minting Corporation of India Ltd (SPMCIL). Mysuru (Karnataka) and Salboni (West Bengal) belong to Bharatiya Reserve Bank Note Mudran Pvt Ltd (BRBNMPL), a wholly owned subsidiary of the RBI.
• Mints (four): Mumbai, Hyderabad, Kolkata and Noida, all run by SPMCIL.

What backs the currency? The Minimum Reserve System

Earlier, India followed a proportional reserve system, under which a fixed share of the notes issued had to be backed by gold and foreign assets. Since 1957, India follows the Minimum Reserve System: the RBI must hold at least ₹200 crore worth of gold and foreign exchange, of which at least ₹115 crore must be gold.

Beyond this minimum, the RBI can issue notes based on the economy's needs, backed by assets such as government securities. Money in India is therefore fiat money: its value rests on the trust in the government and the RBI, not on gold.

How does cash move around the country?

1. The RBI estimates how many notes of each denomination will be needed in the coming year, based on GDP growth, inflation, the need to replace soiled notes and reserve stock.
2. The presses print the notes, and the RBI's Issue Offices receive them.
3. From there, notes go to currency chests: secure storehouses kept at selected bank branches on the RBI's behalf. Banks draw cash from these chests for their branches and ATMs.
4. Old, soiled and torn notes come back through banks. The RBI checks them, and those unfit to use are shredded and destroyed.

The RBI's Clean Note Policy aims to give the public good-quality notes and to withdraw soiled ones quickly. Under the RBI's note refund rules, people can exchange torn or damaged notes at bank branches and RBI offices.

Fighting fake notes

Fake Indian Currency Notes (FICN) are tackled in three ways:

• Security features: watermarks, a security thread, colour-shifting ink, latent images, micro-lettering and raised (intaglio) printing that can be felt.
• Detection and reporting: banks must check notes with machines and report every fake they find. The RBI publishes the numbers each year in its Annual Report.
• Law: Counterfeiting currency is a crime under Section 178 of the Bharatiya Nyaya Sanhita, 2023 (earlier Section 489A of the Indian Penal Code). Producing or circulating high-quality fake notes to threaten the economy can also count as a "terrorist act" under the Unlawful Activities (Prevention) Act, 1967.

Commonly confused concepts

• Banknote vs coin vs ₹1 note: Banknotes from ₹2 upwards are RBI liabilities issued under the RBI Act. Coins and the ₹1 note are issued by the Government of India.
• Currency in circulation vs money supply: CIC is only the notes and coins out in the economy. Money supply (like M3) also includes bank deposits.
• e₹ (digital rupee) vs UPI: The digital rupee is RBI-issued currency in electronic form, a direct liability of the RBI. UPI is only a system to move money between bank accounts; the money is still bank deposits.
• Demonetisation vs withdrawal from circulation: Demonetisation ends legal tender status. Withdrawal (as with the ₹2,000 note in 2023) only stops fresh issue; the note stays legal tender.

Issues, criticism and the way forward

• Cost of cash: Printing, transporting, storing and destroying notes costs thousands of crores every year. Digital payments can lower this cost.
• Rising fakes in the ₹500 note: Because the ₹500 note carries most of the cash value, it is the main target of counterfeiters. Experts suggest regular upgrades of security features and wider use of note-sorting machines.
• High dependence on high-value notes: A large share of value in one note makes hoarding easier. But for many people, cash is still the most reliable way to pay.
• Balance with digital: Cash works without internet, phones or bank accounts. The way forward suggested by many experts is a "cash-lite" system: steady digital growth, with clean and genuine cash always available.

Concepts to Know

• Denomination: The face value of a note or coin, like ₹10, ₹100 or ₹500.
• Fiat money: Money that has value because the government declares it legal tender and people trust it, not because it is backed by gold.
• Liability: Something one owes. Every banknote is a liability of the RBI, because the RBI promises its value.
• Currency chest: A secure store of notes and coins kept at a bank branch on behalf of the RBI, from which nearby branches and ATMs are supplied.
• Soiled note: A note that has become dirty, worn or limp through use, but is still genuine.
• Watermark and security thread: A watermark is a faint picture seen when a note is held against light. The security thread is a thin strip inside the paper, which on new notes changes colour when the note is tilted.