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Sujai Adithya
Business Development and Banking & Financial Services Expert
Asked a question last year

What is the Minimum Reserve System of RBI?

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Sujai Adithya
Business Development and Banking & Financial Services Expert

The Reserve bank of India has the authority to issue currency. The current system 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 exchange 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 liability 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 relationship between note issue and its reserve backing is usually done on the basis of a reserve system by central banks across the world. The reserve system provides guidelines for the issue of new currencies.

In India, currencies are issued by the RBI with the backing of reserves comprised of gold and foreign exchange (foreign currencies). For the issue of currencies, the RBI follows Minimum Reserve System at present. The Minimum Reserve System (MRS) is followed from 1956 onwards.

Under the Minimum Reserve System, the RBI has to keep a minimum reserve of Rs 200 crore comprising of gold coin and gold bullion and foreign currencies. Out of the total Rs 200 crores, Rs115 crore should be in the form of gold coins or gold bullion. The purpose of shifting to MRS was to expand money supply to meet the needs of increasing transactions in the economy.

The minimum reserve is a token of confidence and doesn’t have any practical connection with amount new currencies issued by the RBI. Under the Minimum Reserve System, RBI can issue unlimited amount of currency by keeping the reserve. But RBI follows some principle or rule for issuing new currencies based upon economic growth and transaction needs of the people.