Modern forms of money: currency, deposits and digital money

Detail

1. What "modern money" means

• Modern money = currency + deposits with banks (Class 10, Money and Credit).
• Older money such as the karshapana (a punch-marked silver coin of ancient India) had value because of the metal in it.
• Modern money is different. It has almost no value as a thing. Its value comes from trust: trust in the government that issues currency, and trust in the banks that hold deposits.

2. Currency

• Currency means the paper notes and coins that people use to pay each other.
• No value in itself: it is not made of a precious metal, and you cannot use a note for anything except paying.
• Accepted because the government authorises it. This kind of money is called fiat money (money that has value because the government orders it, not because of what it is made of).
• Legal tender means money that nobody can legally refuse when you use it to pay a debt. In India, rupee payments cannot legally be refused.

Who issues what (legal basis)

• Banknotes → RBI. Section 22 of the RBI Act, 1934 gives the RBI "the sole right to issue banknotes in India" [2].
• Coins → Government of India. Under the Coinage Act, 2011, the Government designs and mints coins. The RBI only distributes them [2].
• ₹1 notes are issued by the Government of India, not the RBI. They are also legal tender [3].
• Section 26, RBI Act, 1934: every RBI banknote "shall be legal tender at any place in India" [2].
• The RBI must pay the value of the note to the holder on demand [3].

• This is what the line "I promise to pay the bearer…" on a note means. It is the RBI's promise to the person holding the note [2].

• Limits on coins as legal tender [2]:

• Coins of ₹1 and above: legal tender for any amount up to ₹1,000 in one payment.
• 50 paise coins: legal tender only up to ₹10.

• So a shopkeeper can legally refuse ₹5,000 paid in ₹1 coins.

• Denominations in use (RBI FAQ, updated April 2025) [2]:

• Notes: ₹10, ₹20, ₹50, ₹100, ₹200, ₹500, ₹2000.
• Coins: 50 paise, ₹1, ₹2, ₹5, ₹10, ₹20.

• The ₹2000 note is still legal tender, even though far fewer of them are in circulation now [2].

• Legal tender can be withdrawn. In the 2016 demonetisation (8 November 2016), the old ₹500 and ₹1000 notes stopped being legal tender (Class 12 box). A note's value rests only on the government's word.

3. Demand deposits

• Deposit means money that people keep in a bank.
• Why people deposit: they keep spare cash in banks. For example, salaried workers have extra cash at the start of the month.
• Benefits: the money is safe, and it earns some interest.
• Demand deposits are deposits that can be withdrawn on demand, at any time. That is where the name comes from. Savings and current accounts are demand deposits.

4. Cheques: why deposits count as money

• A cheque is a paper that tells a bank to pay a fixed amount from the payer's account to the person named on the cheque.
• Class 10's example (M. Salim):
• Salim is a shoe manufacturer. He pays his leather supplier by cheque.
• The supplier deposits the cheque in his own bank.
• The money moves from Salim's account to the supplier's account "in a couple of days".

• No cash is used at any point.

• Why this makes deposits money:

• Demand deposits are widely accepted as a means of payment.

• So they "share the essential features of money".

• Money depends on banks. "But for the banks, there would be no demand deposits." Modern money is tied to the banking system.

• Time deposits (fixed deposits) are locked for a fixed period.
• They earn more interest than demand deposits.
• They cannot be spent directly until they mature (reach the end of the fixed period).
• So they are "less liquid". Liquidity means how quickly and easily something can be used to pay.

Worked example: measuring money (Class 12, Money and Banking)

• The RBI measures the money supply (the total money held by the public) with measures called M1 to M4.
• M1 = CU + DD + OD
• CU = currency (notes and coins) held by the public
• DD = net demand deposits with banks

• OD = other deposits with the RBI

• M3 = M1 + net time deposits of banks

• Example (made-up numbers): CU = ₹30 lakh crore, DD = ₹25 lakh crore, OD = ₹1 lakh crore, time deposits = ₹150 lakh crore.
• M1 = 30 + 25 + 1 = ₹56 lakh crore

• M3 = 56 + 150 = ₹206 lakh crore

• Lesson: in a modern economy, most money is bank deposits, not cash.

5. Digital money

• Digital money is money in electronic form. You cannot touch it. It moves through debit and credit cards, net banking and UPI, not through notes and coins.
• Class 7's example: Krishnappa's fruit cart has a QR code (a printed square code that a phone camera can read). A customer scans it, and the payment goes straight into his bank account.

Key distinction: a channel is not money

• Cards, net banking and UPI are channels. They move money that already exists as deposit money from one account to another.
• They do not create new money.

• Class 10: plastic cards are "not all money per se".

• UPI (Unified Payments Interface) is a system for instant bank-to-bank payments using a mobile phone. It was launched in 2016 and completed 10 years in 2026 [6].

• Monthly transactions crossed 2,000 crore for the first time in August 2025 (2,001 crore) [6].
• December 2025 had 2,163 crore transactions. This was UPI's highest monthly volume so far [6].
• The IMF has recognised UPI as the world's largest real-time payment system. It handles about 49% of global real-time transactions [7].
• All of this is still deposit money moving between banks. UPI settles through bank accounts [4].

e₹ (CBDC): the exception

• CBDC (Central Bank Digital Currency) is currency issued in digital form by a country's central bank.
• e₹ (Digital Rupee) is India's CBDC. It is the digital form of the physical rupee. The RBI issues it [4].
• Like a note, it is a direct liability of the RBI. A liability is an amount owed. The RBI "owes" the value of every e₹, just as it owes the value of every note.

• It is legal tender under Section 26 of the RBI Act, 1934 [4].

• Pilots began in 2022:

• Wholesale: 1 November 2022

• Retail: 1 December 2022

• Two types [4]:

• e₹-R (retail): for the general public's everyday payments.

• e₹-W (wholesale): for financial institutions, used for large payments between banks and for trading government securities.

• Features [4]:

• No interest on e₹ wallet balances, because it is meant to work like cash.
• Offline payments are possible where the internet is weak.
• Programmability: the sender can limit how the money is used, for example by expiry date, place or type of shop.

• 19 banks offer retail e₹ wallets. 16 entities take part in the wholesale pilot.

• e₹ vs UPI [4]:

	e₹	UPI
What it is	Money itself (RBI's liability)	A payment channel
Store of value?	Yes, it sits in a wallet like cash	No, money stays in the bank account
Settles through	Wallet to wallet	Bank accounts

• Use in welfare: a CBDC-based food subsidy pilot under PMGKAY (Pradhan Mantri Garib Kalyan Anna Yojana) started in Puducherry on 26 February 2026 [5].
• Programmable e₹ can only be spent on food, so the subsidy reaches its purpose.

Cryptocurrencies: not money in India

• Cryptocurrencies (such as Bitcoin) are digital tokens made by private computer networks.
• In India they are neither legal tender nor money.

• No sovereign guarantee (a promise by the government or central bank) stands behind them.

• In 2017, the Government warned people about the risks of investing in virtual "currencies" and compared them to Ponzi schemes (schemes that pay old investors with new investors' money until they collapse) [9].

• The Finance Ministry has told Parliament that crypto assets are borderless. Regulating or banning them works only with international collaboration, to stop regulatory arbitrage (people moving to whichever country has the weakest rules) [8].
• The RBI has issued public notices warning of the economic, legal, security and consumer-protection risks of virtual currencies [8].

6. Towards a cashless society (Class 12)

• A cashless society is one where transactions happen through digital information instead of notes and coins.
• India's building blocks:
• Jan Dhan accounts: bank accounts for people who had none.
• Aadhaar-enabled payment systems: payments confirmed with Aadhaar and fingerprints.
• e-wallets: apps that store money for payments.
• National Financial Switch (NFS): the network that connects ATMs of different banks.

• Mobile-phone penetration: most people now own a phone.

• Linked notes: Crypto-assets → financial-markets-instruments; CBDC design → banking-monetary-policy; UPI rails → payment-systems-digital-finance.

Prelims Hooks

• Modern money = currency + demand deposits. Time deposits cannot be spent directly, so they sit in M3, not M1.
• The sole right to issue banknotes comes from Section 22, RBI Act, 1934. Legal tender status comes from Section 26 [2].
• Trap: coins are minted by the Government of India under the Coinage Act, 2011. They are not minted by the RBI, which only distributes them. ₹1 notes are also issued by the Government [2][3].
• Coins of ₹1 and above are legal tender only up to ₹1,000 in one payment. 50 paise coins count only up to ₹10 [2].
• The ₹2000 note is still legal tender [2].
• UPI, cards and net banking are payment channels, not money. e₹ is money: it is a direct RBI liability and legal tender [4].
• e₹ pilots: wholesale on 1 November 2022, retail on 1 December 2022. e₹ wallets pay no interest [4].
• Trap: "Bitcoin is legal tender in India" is false. Crypto has no sovereign backing.
• IMF: UPI handles about 49% of global real-time payment transactions [7]. Its highest monthly volume was 2,163 crore transactions (December 2025) [6].

Mains Points

• Trust is the base of modern money.
• Currency depends on the government's word (Section 26). Deposits depend on banks staying healthy.
• Demonetisation (2016) showed that legal tender status can be withdrawn overnight.

• Bank failures show why deposit insurance and banking regulation are needed to protect "deposit money".

• CBDC vs UPI: does India need both?

• UPI already makes payments instant.
• e₹ adds three things UPI does not have: settlement in central-bank money, offline use, and programmability (targeted welfare such as the PMGKAY pilot) [4][5].

• Risk: if people move savings from bank deposits into e₹, banks lose funds they use for loans. This is called disintermediation. Paying no interest on e₹ reduces this risk [4].

• Crypto vs sovereign money: private tokens carry risks of fraud, money laundering and weak monetary control. India's approach is to warn users, tax and watch crypto, and push for international rules [8][9], while offering a state-backed digital option (e₹).

• Limits of a cashless push (GS-III inclusion):
• UPI's scale shows digital payments have taken off [6][7].
• But people with no internet, weak digital skills or exposure to cyber-fraud still rely on cash.
• So India needs cash and digital money to exist side by side, with offline e₹ and UPI Lite serving areas with weak connectivity.