The Reserve bank of India2 has the authority to issue currency. The current system2 of Indian government to issue notes is “Minimum Reserve System”. Under this policy, the minimum reserves to be maintained in the form of gold and foreign exchange3 should consists of rupees 200 crore. Out this reserve, the value of gold to be maintained is rupees 115 crore. This system was introduced in 1956 replacing the proportional reserve system, and continues till date.
The RBI has Issue Department under it for issue of currency. Minimum reserves refer to the reserves maintained by the RBI against the notes issued. The currency issued is the liability2 to RBI, as it has to pay the currency holder the amount promised on the currency note. Therefore RBI maintains certain reserve against this liability.
The department can issue any number of notes maintaining the aforementioned reserve. But RBI has certain rules for issue of currency which is based on the economy of the country. This system is inflationary in nature. This system has flexibility to increase the money supply to meet the transactional needs of the people in the country.
The issue of currency note is under the RBI Act of 1935. There are a number of amendments made under this act. The present currency note cannot be issued by the RBI in unlimited amount as it is an in-convertible paper note. Under the current provisions, additional currency can be issued by the RBI without maintaining the additional reserves.