Minimum Reserve System in India

The system of note issue prevailing in India at present is the Minimum Reserve System (MRS). Let's discuss this system in detail.

Definition of MRS

Under the MRS, the central bank of a country (in India, it is the Reserve Bank of India) has to maintain a minimum reserve of gold and foreign exchange with itself. This reserve acts as a backing for the currency issued by the central bank. The central bank can issue currency notes up to a certain limit against this reserve.

Features of MRS

1. Minimum Reserve Requirement: The central bank has to maintain a minimum reserve of gold and foreign exchange. In India, the minimum reserve requirement is Rs. 200 crore of which at least Rs. 115 crore should be in gold.

2. Issue of Currency: The central bank can issue currency notes up to a certain limit against the minimum reserve. In India, the limit is three times the value of the minimum reserve.

3. Elasticity: The central bank can increase or decrease the currency in circulation by changing the minimum reserve. If the minimum reserve is increased, the central bank can issue more currency notes. Similarly, if the minimum reserve is decreased, the central bank can issue less currency notes.

Advantages of MRS

1. Control over Inflation: The central bank can control inflation by adjusting the minimum reserve. If there is too much currency in circulation, the central bank can increase the minimum reserve to reduce the currency in circulation.

2. Stability: The MRS provides stability to the currency as it is backed by a minimum reserve of gold and foreign exchange.

3. Flexibility: The central bank can adjust the currency in circulation according to the changing economic conditions.

Conclusion

Thus, the Minimum Reserve System is the system of note issue prevailing in India at present. It provides stability and flexibility to the currency while allowing the central bank to control inflation.