RAS question
Which system does RBI follow for note issuance?
Correct answer: (B) Minimum Reserve System.
Since 1957, the RBI has followed the Minimum Reserve System for issuing currency notes in India.
Explanation
India moved away from the proportional reserve approach because it placed rigid limits on the central bank when development plans and a growing monetised economy needed a more flexible currency supply. The Minimum Reserve System replaced that approach. Under it, the RBI does not have to back every rupee of notes with a fixed proportion of gold and foreign securities; it has to maintain specified minimum backing instead. That minimum is Rs. 200 crore in all: Rs. 115 crore in gold coin and bullion and Rs. 85 crore in foreign securities, regardless of the volume of notes issued. Since 1957, Indian currency note issuance has therefore operated under the Minimum Reserve System.
Why the other options are wrong
- (A) Full Backing System is wrong because the RBI issues notes under minimum statutory backing, not 100 percent gold backing for every note issued.
- (C) Fixed Fiduciary System is wrong because the operative system is the Minimum Reserve System, not a fixed gold-backed fiduciary limit.
- (D) Proportional Reserve System is wrong because it was the original RBI Act model before the Minimum Reserve System replaced it.
Concept
RBI currency management covers who issues bank notes and what reserve backing the Issue Department must maintain. In RAS preparation, RBI functions, note issue and monetary control converge in one banking topic.