Standard of deferred payment

Also called: deferred payment · Topic: Money: From Barter to Digital Currency · NCERT: Class 7, Ch 11 "From Barter to Money"

Meaning

Standard of deferred payment is the function of money that lets people agree on a payment today, state it in money, and settle it at a later date. For example, a loan, an EMI or the balance on a ₹100 book (pay ₹50 now and ₹50 later) is fixed in rupees now and paid later.

• It is one of the two secondary functions of money in NCERT. The other is store of value.
• It matters because it makes credit possible. It works only if people trust that a rupee tomorrow will be worth about the same as a rupee today.
• Key formulas:
• Value of money = 1 / Price level
• Real interest rate ≈ Nominal interest rate − Inflation rate

Explanation

How it works

• Deferred means "postponed" or "paid later".
• A future payment needs a unit that both sides agree on. Money gives that unit.
• Under barter, a loan of 10 kg of rice raises hard questions. Which quality of rice? Will the rice rot before it is returned?

• With money, the debt is a simple amount such as ₹1,000. It does not rot, and both sides know exactly what is owed.

• Everyday examples: loans, EMIs, salaries and rent. Each is fixed in money today and paid later.

• Legal tender (money that people must, by law, accept when a debt is paid) backs this function. A lender cannot refuse repayment in the country's official money.

Why it is a "secondary" function

• It depends on the two primary functions:
• Unit of account: the debt must first be measured in money.

• Medium of exchange: the debt is then settled by handing over money.

• It is closely linked to store of value, because both carry value from the present into the future.

• Keynes put it this way: "The importance of money flows from it being a link between the present and the future." This line is the epigraph of NCERT Class 7.

What weakens it: inflation

• Inflation means a continuing rise in the general price level.
• Purchasing power of money means how much one unit of money can buy. It moves in the opposite direction to prices.
• Chain of effects:
• Prices rise.
• Each rupee buys less.

• Lenders get back rupees that are worth less than the rupees they lent.

• Worked example 1: purchasing power

• You lend ₹1,000. By the time it is repaid, the price index has risen from 100 to 125, so prices are up 25%.
• The value of money falls from 1/100 to 1/125.
• Fall = 1 − 100/125 = 20%.

• So the ₹1,000 you get back buys 20% less. It is not 25% less.

• Worked example 2: real interest rate

• A bank lends ₹1,000 at 5% interest. Inflation is 8%.
• Real interest rate ≈ 5% − 8% = −3%.

• The lender loses in real terms and the borrower gains.

• The order in which money's functions break down:

• Moderate inflation first weakens the secondary functions: store of value and deferred payment.
• Hyperinflation (prices can double within weeks or days) breaks even the primary functions. Sellers refuse the local currency, and prices start to be quoted in a foreign currency such as the US dollar.
• Examples beyond NCERT: Weimar Germany (1923), Zimbabwe (2008) and Venezuela (late 2010s).

Who wins and who loses

• Losers: lenders, savers and people on fixed incomes, such as pensioners.
• Gainers: borrowers with fixed-rate loans, because they repay in cheaper rupees.

In India

• The concept in daily life: home-loan EMIs, monthly salaries, rent agreements and shop credit (the NCERT book example) are all promises fixed in rupees and paid later.
• Who protects it: the RBI, through monetary policy. Monetary policy means RBI's management of interest rates and money supply.

• The primary objective of monetary policy is "to maintain price stability while keeping in mind the objective of growth" [4].

• The law behind it:

• The RBI Act, 1934 was amended in 2016 to create a statutory framework for flexible inflation targeting [4].
• Flexible inflation targeting means the RBI aims at a numerical inflation target but may also care about growth in the short run.
• Under Section 45ZA, the Central Government, in consultation with RBI, sets the inflation target in terms of CPI, once every five years [5].

• CPI (Consumer Price Index) tracks the prices of a fixed basket of goods and services that households buy.

• The target: 4% CPI inflation, with an upper tolerance level of 6% and a lower tolerance level of 2% [4][6].

• It was first notified on 5 August 2016 [4].
• It was retained on 31 March 2021 for 1 April 2021 – 31 March 2026 [4].

• It was retained again on 25 March 2026 for 1 April 2026 – 31 March 2031 [4].

• Failure of the target: average CPI inflation above 6% or below 2% for three consecutive quarters [4].

• Who decides the rate: a six-member Monetary Policy Committee (MPC) sets the policy repo rate [4].

• Repo rate means the interest rate at which the RBI lends money to banks for a short period.

• Digital rupee (e₹): RBI defines CBDC as "the legal tender issued by a central bank in a digital form" [2][3].

• It is exchangeable at par with paper currency [2].
• Because it is legal tender, it can also settle future debts. Only the form of money changes; the function stays the same.

Don't confuse with

• Store of value: this carries your own wealth into the future, for example savings kept for later use. Standard of deferred payment settles a debt owed to someone else in the future. Both are secondary functions, and inflation weakens both.
• Unit of account: this measures value now (pen ₹10 ÷ pencil ₹2 = 1 pen = 5 pencils). Standard of deferred payment uses that same unit to fix a payment later. Unit of account is primary; deferred payment is secondary.
• Medium of exchange: this settles a trade on the spot. Deferred payment separates the deal (today) from the payment (later).
• RBI's "three functions" framing: RBI's CBDC Concept Note lists only three functions (medium of exchange, unit of account and store of value) and does not name deferred payment separately [2]. NCERT's four functions (2 primary + 2 secondary) is the standard version for UPSC.

Prelims Hooks

• NCERT classification: primary functions are medium of exchange and unit of account. Secondary functions are store of value and standard of deferred payment.
• NCERT Class 7 example: a ₹100 book paid for as ₹50 now and ₹50 later shows money as a standard of deferred payment.
• Trap: RBI's CBDC Concept Note (Oct 2022) counts only three functions of money. Deferred payment is not listed as a separate function [2].
• Under moderate inflation, store of value and deferred payment are damaged first. Only hyperinflation breaks medium of exchange and unit of account.
• Real interest rate ≈ nominal rate − inflation: a 5% loan with 8% inflation gives about −3%. The lender loses and the borrower gains.
• Inflation target of 4% CPI ± 2% is set by the Central Government in consultation with RBI (not by RBI alone) under Section 45ZA of the RBI Act, 1934 [4][5].

Mains Points

• Inflation quietly shifts wealth.
• Rising prices shrink the real value of fixed rupee debts.
• Wealth moves from savers, pensioners and lenders to borrowers.
• If lenders expect this, they charge higher interest or lend less, and credit for investment dries up.

• This is why the 2016 amendment to the RBI Act made 4% ± 2% CPI a legal target, renewed in 2021 and again in 2026 for 2026–31 [4].

• Flexibility versus credibility (the band debate).

• The 2–6% band lets the MPC respond to growth and to supply shocks such as a bad farm harvest [5].

• But frequent breaches of the band can weaken trust that a rupee will hold its value. That trust is what long-term contracts (loans, EMIs, pensions and rent) depend on.

• Same function, new form.

• From the karshapana to paper notes, UPI and the e₹, money still settles future debts. Only its form changes.
• The e₹ is legal tender, at par with cash, and meant to complement, not replace existing money [2].
• Open questions remain on privacy and on the risk of deposits moving out of banks, which could reduce the bank credit on which deferred payments rest.

Related concepts

• Money
• Functions of money
• Medium of exchange
• Unit of account
• Purchasing power of money
• Store of value
• Money's worth

Read more

• What money is and what it does