Currency

Also called: Paper notes and coins · Topic: Money: From Barter to Digital Currency · NCERT: Class 7, Ch 11 "From Barter to Money"; Class 10, Ch 3 "Money and Credit"

Meaning

Currency means paper notes and coins that have no intrinsic value (the paper or metal itself is worth very little) but are accepted as the medium of exchange (the thing people accept when they buy and sell). In India, the RBI issues banknotes, while the Government of India issues coins and ₹1 notes [2][3].

This matters because the rupee is fiat money. Its value comes from the issuer's guarantee and people's trust, not from its material. That makes currency a social contract (an unwritten agreement that everyone will accept it).

Explanation

How a "worthless" note gets its value

• The material is worth less than the face value.
• The paper in a ₹100 note costs far less than ₹100.

• The metal in a ₹5 coin is "probably not worth ₹5" (NCERT Class 12, Money and Banking).

• The value comes from the guarantee of the issuer.

• The RBI Governor signs a promise on every note: "I promise to pay the bearer the sum of … rupees".

• The note also says "Guaranteed by the Central Government".

• Class 10 NCERT says modern currency "is without any use of its own". People accept it because the government authorises it.

• "Fiat" is Latin for "by order". Currency has value because the state orders it.

From full-bodied coins to fiat currency

• Full-bodied commodity money: a coin whose gold or silver is worth as much as its face value.
• Its value would stay even if the state stopped backing it.

• Example: the ancient Indian karshapana.

• Fiat currency: its value depends only on trust in the issuer.

• The modern rupee is pure fiat money.

• The journey: metal coin (value from metal) → paper note (value from the RBI's promise) → digital token, the e-rupee (e₹) (value from the same promise).

What backs the notes

• Backing means the assets the RBI must hold against the notes it issues.
• Proportional reserve system (1935-56):
• 40% of the assets backing notes had to be gold coin, gold bullion or sterling securities.

• Example: to issue ₹100 crore of notes, at least ₹40 crore had to be gold or sterling.

• Minimum reserve system (since 1956-57):

• The RBI must hold at least ₹200 crore of gold and foreign assets.

• At least ₹115 crore of this must be gold.

• Why this floor no longer limits how many notes are issued:

• Banknotes in circulation were ₹36,86,811 crore at end-March 2025 [4].
• ₹200 crore ÷ ₹36,86,811 crore ≈ 0.005%.
• So the real anchor is trust plus monetary policy (RBI action on interest rates and money supply to control inflation).

Seigniorage: the profit from issuing currency

• Formula: Seigniorage = Face value of money issued − Cost of producing it.
• Worked example:
• Say a ₹500 note costs ₹3 to print.
• It still buys ₹500 of goods.

• Seigniorage = ₹500 − ₹3 = ₹497.

• How the RBI earns it:

• Notes are a liability of the RBI (something it owes), but it pays no interest on them.
• Against them, it holds interest-earning assets such as government securities and foreign assets.
• The interest it earns adds to the surplus it transfers to the government each year.

In India

• Legal basis and issuers:

Item	Law	Issuer	Where made
Banknotes (₹10 upward)	RBI Act 1934, Section 22 (sole right)	RBI; signed by the Governor	Nashik, Dewas (SPMCIL, owned by GoI); Mysuru, Salboni (BRBNMPL, RBI subsidiary) [2]
Coins and ₹1 note	Coinage Act, 2011	Government of India; ₹1 note signed by the Finance Secretary	Mints at Mumbai, Hyderabad, Kolkata, Noida (SPMCIL) [2]

• Banknotes: "In terms of Section 22 of the Act, Reserve Bank has the sole right to issue banknotes in India" [2].
• Coins:
• The Government of India designs and mints coins [2][3].

• The RBI acts only as the Government's agent for distributing, issuing and handling coins. So coins reach the public only through the RBI [3].

• Current denominations:

• Banknotes: ₹10, ₹20, ₹50, ₹100, ₹200, ₹500, ₹2000 [2].

• Coins: 50 paise, ₹1, ₹2, ₹5, ₹10, ₹20 [2].

• Legal tender (money the law says must be accepted to settle a payment):

• Coins of ₹1 and above are legal tender for any sum up to ₹1,000 in a single transaction [2].
• 50-paise coins are legal tender only up to ₹10 [2].

• ₹1 notes issued by the Government of India are also legal tender [2].

• Latest data (2024-25) [4]:

• The value of banknotes in circulation rose 6.0%. Their number rose 5.6%, to 15,50,720 lakh pieces.
• ₹500 notes made up 86% of the value and 40.9% of the number of notes.
• Coins in circulation rose 9.6% in value and 3.6% in number.
• Note printing cost ₹6,372.8 crore, up from ₹5,101.4 crore in 2023-24, because printing orders were larger.
• Counterfeit notes detected totalled 2,17,396. Fake ₹500 notes rose 37.3%.
• The value of e₹ (the RBI's CBDC, or Central Bank Digital Currency) in circulation rose 334%, to ₹1,016.5 crore.

Don't confuse with

• Full-bodied commodity money: its metal is worth its face value. Currency (fiat money) has almost no material value and depends only on trust in the issuer.
• Legal tender: this is the legal duty to accept money in payment, and it can have limits (for example, 50-paise coins only up to ₹10) [2]. Currency is the physical form of money: notes and coins.
• RBI's sole right vs "only RBI issues currency": the RBI's monopoly covers banknotes only. Coins and ₹1 notes are issued by the Government of India [2][3]. NCERT Class 7 and Class 10 loosely say only the RBI can issue currency. That is not accurate.
• SPMCIL vs BRBNMPL: SPMCIL is owned by the Government of India and runs 2 note presses (Nashik, Dewas) and all 4 mints. BRBNMPL is owned by the RBI and runs 2 note presses (Mysuru, Salboni) [2].

Prelims Hooks

• RBI Act 1934, Section 22 gives the RBI the sole right to issue banknotes. Coins are issued by the Government of India under the Coinage Act, 2011 [2][3].
• Trap: the statement "Only the RBI can issue currency in India" is false. The Government of India issues coins and ₹1 notes, and the RBI only distributes coins as the government's agent [3].
• The ₹1 note carries the Finance Secretary's signature. All other notes carry the RBI Governor's signature.
• Minimum reserve system (since 1956-57): ₹200 crore of gold and foreign assets, of which at least ₹115 crore must be gold. It replaced the 40% proportional reserve system (1935-56).
• Legal tender limits: coins of ₹1 and above up to ₹1,000 per transaction; 50-paise coins up to ₹10 [2].
• Seigniorage = face value − cost of production. The RBI spent ₹6,372.8 crore on printing notes in 2024-25 [4].

Mains Points

• Trust is the real backing (GS-III):
• The ₹200 crore gold floor is only about 0.005% of the notes in circulation at end-March 2025 [4].
• So the rupee's value depends on the RBI keeping inflation low, through the Monetary Policy Committee and inflation targeting.

• This is a strong argument for central bank independence. If people stop trusting the issuer, fiat currency loses value.

• Split authority and seigniorage (GS-II/GS-III):

• The RBI issues notes and the government issues coins. But all coins reach the public through the RBI, so currency management stays with one agency [3].

• Seigniorage adds to the RBI's surplus transfer to the government. This raises a debate: how much should go to the government, and how much should the RBI keep as a buffer against risk?

• Cash dependence, cost and counterfeiting:

• In 2024-25, currency grew 6.0%, ₹500 notes carried 86% of its value, and fake ₹500 notes rose 37.3% [4].
• Printing costs rose from ₹5,101.4 crore (2023-24) to ₹6,372.8 crore (2024-25) [4].
• These trends test the "less-cash" and anti-counterfeit goals of the 2016 demonetisation. They also support the case for digital payments and the e₹, whose value in circulation rose 334% in 2024-25 [4].

Related concepts

• Fiat money
• Minimum reserve system
• Seigniorage

Read more

• Fiat money and India's currency authority