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Which system of issue of currency note is followed by RBI?
  • a)
    Fixed Fiduciary System 
  • b)
    Proportional Reserve System 
  • c)
    Percentage Reserve System 
  • d)
    Minimum Reserve System 
Correct answer is option 'D'. Can you explain this answer?
Verified Answer
Which system of issue of currency note is followed by RBI?a)Fixed Fidu...
D: Minimum Reserve System
The Reserve Bank of India (RBI) follows the minimum reserve system for issuing currency notes. Under this system, the RBI is required to maintain a certain minimum amount of gold and foreign exchange reserves as a backing for the notes it issues. The RBI can issue currency notes up to a certain limit, known as the statutory liquidity ratio (SLR), based on the value of these reserves.
In the minimum reserve system, the RBI can issue notes up to a certain limit based on the value of its reserves, but it is not required to hold reserves in proportion to the amount of notes it issues. This allows the RBI to have some flexibility in issuing currency notes to meet the demand for cash in the economy.
The fixed fiduciary system, proportional reserve system, and percentage reserve system are other systems that have been used by central banks to issue currency notes. However, they are no longer in use in modern times. The fixed fiduciary system required the central bank to maintain a fixed amount of reserves for every unit of currency issued, while the proportional reserve system required the central bank to hold reserves in proportion to the amount of notes issued. The percentage reserve system required the central bank to hold a certain percentage of its deposits as reserves.
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Which system of issue of currency note is followed by RBI?a)Fixed Fidu...
The system of issue of currency notes followed by RBI is the Minimum Reserve System.

Explanation:

The Reserve Bank of India (RBI) is the central bank of India and is responsible for the issue of currency notes in the country. The system followed by RBI for the issue of currency notes is known as the Minimum Reserve System.

What is the Minimum Reserve System?

The Minimum Reserve System is a system under which the RBI is required to hold a minimum amount of reserves in the form of gold and foreign securities, as a backing for the currency notes issued by it.

Key Points:
- Under the Minimum Reserve System, the RBI is required to hold a minimum reserve of gold and foreign securities equivalent to ₹200 crore, of which at least ₹115 crore should be in the form of gold.
- The RBI can issue currency notes beyond this minimum reserve based on its requirements and the needs of the economy.
- The currency notes issued by the RBI are liabilities of the RBI and are backed by the assets held in the form of gold and foreign securities.
- The RBI has the authority to issue and withdraw currency notes from circulation as per the needs of the economy.
- The RBI also has the responsibility to maintain the stability of the currency and control inflation through its monetary policy measures.

Advantages of Minimum Reserve System:
- The Minimum Reserve System ensures the stability of the currency by maintaining a minimum reserve of gold and foreign securities.
- It provides confidence to the public in the currency issued by the RBI as it is backed by assets.
- The RBI can control the supply of currency notes in the economy based on the requirements, which helps in maintaining price stability.

Conclusion:

The Minimum Reserve System followed by RBI ensures the stability of the currency and provides confidence to the public in the currency notes issued by the RBI. It allows the RBI to control the supply of currency notes in the economy and maintain price stability.
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Community Answer
Which system of issue of currency note is followed by RBI?a)Fixed Fidu...
D: Minimum Reserve System
The Reserve Bank of India (RBI) follows the minimum reserve system for issuing currency notes. Under this system, the RBI is required to maintain a certain minimum amount of gold and foreign exchange reserves as a backing for the notes it issues. The RBI can issue currency notes up to a certain limit, known as the statutory liquidity ratio (SLR), based on the value of these reserves.
In the minimum reserve system, the RBI can issue notes up to a certain limit based on the value of its reserves, but it is not required to hold reserves in proportion to the amount of notes it issues. This allows the RBI to have some flexibility in issuing currency notes to meet the demand for cash in the economy.
The fixed fiduciary system, proportional reserve system, and percentage reserve system are other systems that have been used by central banks to issue currency notes. However, they are no longer in use in modern times. The fixed fiduciary system required the central bank to maintain a fixed amount of reserves for every unit of currency issued, while the proportional reserve system required the central bank to hold reserves in proportion to the amount of notes issued. The percentage reserve system required the central bank to hold a certain percentage of its deposits as reserves.
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Which system of issue of currency note is followed by RBI?a)Fixed Fiduciary Systemb)Proportional Reserve Systemc)Percentage Reserve Systemd)Minimum Reserve SystemCorrect answer is option 'D'. Can you explain this answer?
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