Main Features of The Present Currency System in India

The main features of the present currency system in India are as follows:

1. Coins: The highest advances in Indian coins, mainly after independence, are as follows:

(i) The Indian rupee coin is a symbolic coin which is made by the element nickel. Till 1940, the rupee was made by silver weighing 118 grains and 11/12th fine. During 1940, two improvements took place:

(a) One rupee note was issued

(b) The silver content was reduced from 11/12 to 1/2 fineness. In 1943, two rupee note was further added to meet the increasing request for rupees. The nickel coin came into existence in 1947.

(ii) Earlier 1957, only old-fashioned coins used to be in flow. These coins were one rupee, 8 annas (or half rupee), 4 annas (or quarter rupee), 2 annas, 1 anna, 1/2 anna, 1 paisa, and 1 pie. The association between these coins was as follows 1 rupee = 16 annas = 64 paise = 192 pies.

(iii) As of April 1, 1957, decimal coins system was announced in India. In this system, the Indian rupee was classified into 100 naya paise. The terminology of naya paisa has now been improved to simply paise. To start with old coins keep on in circulation beside with new coins, but with effect from January 1, 1964, old coins stopped to be legal tender. All financial records are now saved in terms of rupees and paise.

(iv) You must take into consideration that these coins are symbol coins and their face value is greater than their fundamental (metallic) value. One rupee coin, one rupee note and the coins of lessor denomination are delivered by the Ministry of Finance, Government of India. The rupee and the half rupee coin are limitless legal tender, whereas all other coins are restricted legal kind up to Rs. 10. Presently, the coins of the denominations of 1, 2, 3, 5, 10, 20, 50 and 100 paise are in circulation.

2. Currency Notes: With the exemption of one-rupee notes, all other notes are delivered by the Reserve Bank of India. The Reserve Bank of India preserves a discrete Issue Department which agreements with delivering of the currency notes. At the present time, notes of rupees 2, 5, 10, 50, 100 and 500, 1000 denominations are in circulation. All these notes are convertible into each other and are limitless legal tender.

3. System of Notes Issue: The Reserve Bank had to preserve not less than 40% funds (against note issue) in gold coins, bullion, and foreign securities with the facility that gold coins and bullion were not at any moment to be less than Rs. 40 crore.

The left over 60% of the reserves were to be enclosed by rupee coins, rupee securities of Government of India, accepted bills of exchange and promissory notes payable in India.

With the introduction of economic planning, after independence, it was felt that the relational reserve system was not sufficiently elastic to meet the developing needs of the country.

In the commencement of Second Five Year Plan, India had to face foreign exchange problems. Its foreign exchange reserves fell from Rs. 950 crore in 1950-51 to Rs. 825 crore in 1955-56. Subsequently, the Reserve Bank of India Act was revised in 1956 and the relative system of note subject was swapped by the smallest reserve system.

According to this modification, it became essential for the Issue Department of the Reserve Bank to keep a minimum of Rs. 400 crore of foreign securities and Rs. 115 crore in gold coins and bullion.

In November 1957, the Reserve Bank of India Act was again revised to decrease the minimum currency reserve in foreign securities. Under the second amendment, the value of all-over least reserve to be conserved by the Reserve Bank is Rs. 200 crore, of which not less than Rs. 115 crore should be retained as gold coins and bullion.

Thus, the present system of circulating notes in India is based on the smallest reserve method. The chief merit of this system is that it is effortlessly elastic; supply can be augmented up to any limit. But, there is also a threat of over-issue and inflation under such a purely managed system.

4. Expansion of Indian Currency: There has been a constant expansion of Indian Currency since independence. The foremost cause for this increase is deficit financing to meet the rising needs of money supply throughout the planning period. Total currency is circulation has enlarged from Rs. 4553 crore in 1970-71 to Rs. 48601 crore in 1989-90.

5. External Value of Rupee: The important progresses with respect to the external value of rupee are as follows:

(i) Prior to the formation of the International Monetary Fund (IMF), India had the genuine exchange standard and the Reserve Bank sustained the external value of rupee in terms of sterling at the rate Rs. 1 = Is. 6d.

(ii) From March 1, 1947, India turns out to be the member of the International Monetary Fund. Every member of the International Monetary Fund has to announce the parity charge of its exchange in terms of gold (or U.S. dollar). India fixed the value of Rs. 1 = 0.268601 gram of pure gold (or 30.23 cents in terms of the U. S. dollar) in 1947. But this gold parity was such that the old rate of Is. 6d was sustained.

(iii) Although India’s membership of the International Monetary Fund, the rupee’s connection with the pound sterling continued. This link was well-thought-out to be beneficial for India as about 30% of India’s trade was with the authentic block and the exchange rate of rupee in relation of pound was supportive in preserving the competitive position of India’s exports.

(iv) In September 1949, the rupee was devaluated by 30.5% resulting the devaluing of pound. New gold parity was professed as Rs. 1 = 0.186621 grams (or Rs. 1 = 21.00 U. S. cents).

(v) Indian rupee was further undervalued on June 6, 1966 to the extent of 36.5% and the new gold parity rate was fixed at Rs. 1 = 0.118489 (or Rs. 1 = 13.33 U. S. cents). This time, the reduction was demanded by the equilibrium of payments problem faced by India.

(vi) By September 1975, Indian rupee was delinked from pound sterling. Subsequently, the external worth of the rupee is communicated in terms of a basket of nominated currencies and varies according to the market forces.

(vii) In a current effort to deal with the grave equilibrium of expenses crisis facing the country, the Reserve Bank of India, in two stages, i.e., on July 1 and 3, 1991, devaluated Indian rupee by 8.97 % to 10.15% and 10.58% to 12.31 % correspondingly in contradiction of the four major world currencies, i.e. the U. S. dollar, the pound sterling, the Deutsch mark and the Japanese yen.

Therefore, together the devaluation in two stages worked out to be more than 20%. Subsequently, the dollar rises in value in relations of Indian rupee from Rs. 21.14 to Rs. 25.88; the pound from Rs. 34.36 to Rs. 41.50; the mark from Rs. 11.75 to Rs. 14.10; and the yen from 15.22 paise to 18.62.

The comprehensive rule aims of devaluing were:

(a) To boost Indian exports,

(b) To reduce Indian imports,

(c) To encourage import substitution and

(d) To check the flight of capital from the country.

6. Exchange Control: It is important for you to note that during World War II, exchange control was introduced in India. However, even after independence, the strategy of strict exchange control persisted. The shortage of foreign exchange and the need for the same demanded the adoption of this measure.

The purpose drive of exchange control after independence was to preserve country’s foreign exchange resources and to permit their suitable use for the country’s economic growth.

All foreign exchange payments are to be made through the Reserve Bank of India in case of the system of exchange control; exporters must submit all foreign exchange earnings to the RBI in exchange for Indian currency; imports are strictly restricted and foreign exchange is made accessible to the particular importers through rationing.

7. Liberalisation of Exchange Rate: You may already be aware that ever since 1992, in a phased manner, all exchange limitations have been detached and Indian rupee has been made fully convertible,

(a) In 1992-93, partial convertibility of rupee was introduced through Liberal Exchange rate Mechanism System (LERMS).

(b) In 1993-94, introduction of convertibility of rupee on trade account took place,

(c) In 1994-95 current account convertibility was announced.

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