Monday, April 30, 2012

Indian Currency System

Indian monetary system is managed by Reserve Bank of India. It is based on inconvertible paper currency. The internal purposes are met by currency notes and coins. For external purposes it can be converted into foreign currencies.


Main Features of India’s Currency System

The main features of Indian currency system can be divided into two heads : internal features and external features.

1) Internal Features of Indian Currency System

The following are the features of currency system of India:

  1. The unit of money in India is Rupee.
  2. The present monetary standard of India is the managed paper currency standard and currency is not convertible into gold.
  3. The Rupee coin in India is standard token coin whose intrinsic value of the metal is less than its face value. The rupee coin is an unlimited legal tender in which payment of any amount can be made. There are also a two rupee coin and a five rupee coin in circulation since 1990.
  4. There are also subsidiary coins in India to assist the token money. At present, coins of the denominations of 1 paisa and 3, 5, 10, 20, 25 and 50 paisa are in circulation. The 50 paisa coin is unlimited legal tender. But all coins from 1 paisa to 25 paisa are limited legal tender for which payment can be made only upto Rs.25 in India. The minting of 1, 3 and 5 paisa coins has been stopped since 1996.
  5. Paper Currency in India consists of notes of various denominations which are issued by the RBI and the Government of India. The one rupee note is issued by the Ministry of Finance and bears the signature of the secretary. All currency notes are legal tender. Currency notes of the denominations of 2, 5, 10, 20, 50, 100 and 500 are issued by the Reserve bank of India. Printing of Rs. 1, 2 and 5 notes has been stopped and Rs. 1000 notes are started. RBI had issued Rs. 1000 note after 22 years in October, 2000.
  6. The present system of note issue in India is the Minimum Reserve System: Under this system, the RBI is authorized to issue notes upto any extent but it must keep a statutory minimum reserve of gold and foreign securities. The RBI is required to keep minimum reserve of Rs. 200 crores. Of this, Rs. 115 crores must be in gold and Rs. 85 crores in foreign securities.

2) External Features of Indian Currency System

Since January 1976 with the signing of Jamaica Agreement, India is following the policy of floating exchange rates. According to this, the external value of Indian rupee is linked to a basket of currencies of those countries with which India has large trade.

Important Terms Related To Currency

  • Hard Currency: A currency traded in a foreign exchange market for which is persistently high relative to the supply. E.g. Pound, Euro and Dollar.
  • Soft Currency: A currency whose exchange rate is tending to fall because of persistent balance of payments deficits or because of the building up of speculative selling of currency is expectation of a change in its exchange rate. Governments are unwilling to hold a soft currency in their foreign exchange reserves.
  • Reserve Currency: A currency which government and international institutions are willing to hold in their gold and foreign exchange reserves and finance as significant proportion of international trade.
  • Fiat Money: Currency which is legally decreed as valid means of financing transactions. It is legal tender.
  • Hot Money: Funds which flow into a country to take advantage of favorable rates of interest in that country. They influence the balance of payments and strengthen the exchange rate of the recipient country.

Aluminum Magnesium Coins

Coins of these metals were first introduced in 1964-65 and it includes 1 paise, 2 paise, 3 paise and 5 paise coins. 10 paise coins were introduced in October 1971 and also includes 10 paise with development oriented designed (Planned Families Food for All) coins introduced from 15 August, 1974. This also includes 20 paise and 10 paise (National Integration) coins introduced on 12.10.82


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