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Why doesn’t RBI print unlimited money?

We may sometimes wonder, why doesn’t RBI print and distribute plenty of money so that no one has to worry about poverty or inflation. Here, we will learn about what are the constraints or implications of printing unlimited money?

What are banknotes?

  • The notes of ₹2, 5, 10, 20, 50, 100, 200, 500 and 2,000 denominations are printed and issued by the Reserve Bank of India (RBI). These notes are called the bank notes.
  • The notes of ₹1 denomination are printed by the Government of India and put into circulation by the RBI. These notes are called the currency notes.

Who can issue bank notes and currency notes?

  • As per Section 22 of Reserve Bank of India (RBI) Act, 1934, RBI has the sole right to issue bank notes in India and currency note of Government of India.
  • As per Section 34 of RBI Act, 1934, the bank notes in circulation are the liabilities of the Issue Department of RBI. 

Which assets can be held as backing for the notes?

As per Section 33 of RBI Act, 1934, the bank notes in circulation shall be backed by assets of the Issue Department of RBI. These assets can be held in the form of – 

  1. Gold coin / bullion
  2. Foreign securities
  3. Rupee coin 
  4. Government of India rupee securities 
  5. Promissory notes drawn by National Bank for loans under Section 17 of RBI Act, 1934.
  6. Bills of exchange and promissory note payable in India eligible for purchase by RBI under Section 17 or 18 of RBI Act, 1934.

What are the criteria for holding these assets?

  • Aggregate value of gold coin / bullion and foreign securities held as assets shall not be less than ₹200 crore. 
  • Aggregate value of gold coin / bullion held as assets shall not be less than ₹115 crore.
  • Of the gold coin / bullion held as assets, at least 17/20 shall be in India. 
  • All gold coin / bullion held as assets shall be in the custody of RBI / its agencies.

Which foreign securities can be held as backing for notes?

Foreign securities which is part of assets shall be –

  • Securities of the following kinds payable in the currency of any foreign country which is member of the IMF – 
    • Balances with principal currency authority of foreign country; balances / securities in foreign currency issued by International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD), International Development Association (IDA) / International Finance Corporation (IFC) / Asian Development Bank (ADB) / Bank for International Settlements (BIS) / any banking or financial institution approved by the Central Government; repayable within 10 years.
    • Bills of exchange bearing 2 or more good signatures – drawn on and payable in foreign country, having maturity up to 90 days.
    • Government securities of foreign country maturing within 10 years.
  • Any drawing rights representing liability of the IMF.

Why doesn’t RBI print unlimited money?

As per Section 33 and 34 of RBI Act, 1934, the liabilities of the Issue Department (notes in circulation) and the assets of Issue Department (backing for notes) shall be equal. For RBI to issue more notes, it has to increase its assets side, which has following limitations –

Asset Limitation in increasing the asset size
Gold coin / bullion There are limitation as to how much of physical gold coins and bullion can held as it would requires large storage capacity.
Foreign securities Investments in foreign securities would require adequate stock of foreign exchange.
Rupee coin Rupee coins are minted by the Government, hence, increasing this would require the Government to mint more coins and print more ₹1 notes.
Government of India rupee securities Investment in Government of India rupee securities may lead to deficit financing and cause inflation in the economy.

What is deficit financing?

When the Government is in deficit (expenditures are more than income), it borrows from the market by issuing government securities. Prior to March 31, 1997, Government would issue Ad-hoc Treasury Bills and RBI would subscribe to such securities which would become its assets. 

On one hand, with increase in its assets size, RBI would print more money and issue it in the economy. With no real goods and services available in the economy, this excess supply of money would lead to inflation (too much money chasing too few goods). On the other hand, Government would spend the money received from the sale of such securities on various schemes and projects in the economy. This would increase the money supply in the economy and would further lead to inflationary pressure. Hence, the practice of RBI subscribing to Ad-hoc Treasury Bills was discontinued on March 31, 1997.

What if RBI prints unlimited money?

Printing of more money in itself may not solve the problems. Without expansion in the production of goods and services, excess money supply in the economy would only lead to inflation as demand would be much more than the supply of goods and services. Hence, focusing on capacity building would be better approach than printing unlimited money.

Where are bank notes printed?

Bank notes are printed at 4 currency presses.

2 are owned by the Government of India through its Corporation, Security Printing and Minting Corporation of India Ltd. (SPMCIL)
Nasik (Western India)
Dewas (Central India)
2 are owned by RBI, through its wholly owned subsidiary, Bharatiya Reserve Bank Note Mudran Private Ltd. (BRBNMPL)
Mysuru (Southern India)
Salboni (Eastern India)

What is the present position of notes and its backing in India?

As per RBI Annual Report 2023-24, the position of assets and liabilities of Issue Department of RBI is –

Liabilities
Amount
(₹ Crore)
 Assets
Amount
(₹ Crore)
Notes Issued 34,78,039.50Gold 1,64,604.91

 

 

 Rupee Coin 458.54

 

 

 Investments-Foreign 33,12,976.05

 

 

 Investments-Domestic 0.00

 

 

 Domestic Bills of Exchange and other Commercial Papers 0.00
Total 34,78,039.50 Total 34,78,039.50

What is Zimbabwe story of hyperinflation?

Zimbabwe experienced almost a decade-long hyper-inflation from 1998 to 2009, as a result of printing vast sums of currency, economic mismanagement, etc. While printing currency, the Zimbabwe government underreported its money printing activities, let alone keeping adequate backing for the currency printed and circulated in the economy. In 2009, the government stopped printing Zimbabwean dollars and allowed people to use the foreign currency of their choice, mostly U.S. dollars. This restored consumer confidence in currency values and inflation rate fell. A new regime in 2019 announced a new Zimbabwe currency that has prompted a return of hyper-inflation. 


References

Reserve Bank of India. (2022, August 29). 'The Reserve Bank of India Act, 1934'. Retrieved from https://rbi.org.in/Scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Act

Reserve Bank of India. (2024, May 17). 'FAQ - Indian Currency (Updated as on May 17, 2024)'. Retrieved from https://www.rbi.org.in/Scripts/FAQDisplay.aspx?Id=136

Reserve Bank of India. (2024, May 30). 'RBI Annual Report 2023-24 - XII. The Reserve Bank’s Accounts for 2023-24'. Retrieved from https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1412

River Financial. (n.d.). 'The History of Monetary Collapse in Zimbabwe'. Retrieved from https://river.com/learn/history-of-monetary-collapse-in-zimbabwe/


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