The Reserve Bank of India (RBI) was established on 1st April 1935 with its headquarters initially at Kolkata but was moved to Mumbai permanently in 1937. RBI was designated the work to control and regulate the monetary and banking policies of the Indian Government and also known as the Banker’s bank.
RBI acts as a bank for all commercial banks in the country by holding all their cash reserves and lends them with short-term funds. Besides, RBI was also assigned with the work of printing money required for the Government of India.
Whenever there’s a crisis we all have a question unsolved about why can’t RBI print tonnes of money and use it for developing public services and infrastructure. Well, there’s an unarguable answer to that.
Influence of Inflation:
A sudden increase in prices of goods and services in an economy is termed as inflation. This also results in a sudden fall of the value of currency of the nation.
Let’s assume that there are only two people living in a country and are receiving an income of ₹10 each. The only production taking place in the country is 2kg of wheat. Here both the persons can buy 1kg of wheat with their ₹10. If the Government doubled the printing of money, individually both of them will have ₹20 ready to buy the total production of wheat (2kgs) because of increased demand.
Now comes the shopkeeper who is ready to face loses if he sold the wheat for ₹10 a kg because of limited supply. As the supply did not meet the demand, the shopkeeper will increase the price of wheat to ₹20 a kg. If the Government does not address the prices of goods and services, there might be a situation where the prices of all goods may increase with decreased value for currency.
A Case Study (Zimbabwe Hyperinflation):
Due to increased national debts, the Government of Zimbabwe increased the supply of currency, which resulted in a decrease in outputs and exports of the country, which led to incapacitate of the economy followed by a huge fall of the value of currency.
In 2008, Zimbabwe witnessed an inflation rate of 2,31,000,000% which means if the price of a candy is ₹1 usually then he/she has to spend ₹2,31,000,000 for a candy.
Minimum Reserve System (MRS):
The Minimum Reserve System was followed by India since 1956. As it helped in the acceleration of the economic growth without an increase of inflation and building trust in the public, it is followed without a pause.
According to this system, the RBI has to maintain assets amounting to at least ₹200 crores all the time. Out of this 200 crores, 115 crores should be in the form of gold coins or gold bullion and the rest of 85 crores should be in the form of foreign currencies. After maintaining these reserves RBI can print money needed for the economy to function on the orders of Government of India.
Gross Domestic Product (GDP):
GDP is the final value of goods and services produced in a country in a year. This is another factor that affects the amount of money needed to print in the economy. If the production of goods and services increases in a country, the value of money increases, which forces the Government to print more money.
If an economy is in crisis, the government cannot print more money as it leads to inflation and does not satisfy the balance between supply and demand.
Soiled and Mutilated note:
Did you ever wonder where the dirty and ripped notes go. Well, these notes are withdrawn from circulation and are burnt down in incinerators under strict surveillance by RBI officials after accounting them in the RBI records.
And these burnt notes are replaced by new banknotes. After checking all these indicators, a demand sheet will be introduced by Issue department which will be kept in front of the Central Government for approval. After approval, RBI will print the money.