In this article we will discuss about the internal and external features of Indiaâ€™s monetary system.
Internal Features of India’s Present Monetary System:
The following are the features of present monetary system of India:
1. Unit of Money:
The unit of money in India is the rupee, it is not only a medium of exchange but also a unit of value which facilitates accounting. As a unit of account, the rupee helps in the estimation of costs and prices and revenues of firms and projects, and the gross national product.
2. Monetary Standard:
The present monetary standard of India is the managed paper currency standard. According to this, the paper currency is in circulation which is non-convertible into gold. It is managed paper standard because the issue of notes and coins is managed by the Reserve Bank of India
3. Types of Coins and Notes (or Currency):
The following types of coins and notes are included in India’s present monetary system:
The Rupee-coin in India is a standard token coin whose intrinsic value of the metal is less than its face value. If the Rupee-coin is melted, its metal will not be sold worth one rupee. The Rupee-coin is an unlimited legal tender in which payment of any amount can be made. There are also 2-Rupee coin and 5-Rupee coins in circulation since 1990.
(ii) Subsidiary Coins:
There are also subsidiary coins in India to assist the token money. At present, coins of the denominations of 1 paisa and 3, 5, 10, 20, 25 and 50 paisa are in circulation. The 50-paise coin like the Indian rupee-coin is unlimited legal tender.
But all coins from 1 paisa to 25 paise are limited legal tender for which payment can be made only up to Rs. 25. The minting of 1, 3, 5, 9 and 10 paisa coins has been stopped since 1996 but they will remain in circulation till their transactions are stopped by the public themselves.
(iii) Notes or Paper Currency:
Paper currency in India consists of notes of various denominations which are issued by the Reserve Bank of India and the Government of India. The one-rupee note is issued by the Ministry of Finance of the Government of India and bears the signature of the Secretary.
It is inconvertible paper money which is also known as fiat money or representative or token money. But it is unlimited legal tender. The other notes of the denominations of Rs. 2, 5, 10, 20, 50, 100 and 500 are issued by the Reserve Bank of India. They are inconvertible into gold but are unlimited legal tender. They are convertible into coins and notes. They are fiduciary money.
(iv) System of Note Issue:
The present system of note issue in India is the Minimum Reserve System. Under this system, the RBI is authorised to issue notes up to any extent but it must keep a statutory minimum reserve of gold and foreign securities. Accordingly, the RBI is required to keep a minimum reserve of Rs.200 crores. Of this, Rs.115 crores must be in gold and Rs.85 crores in foreign securities.
4. Money Supply:
In India, the money supply consists .of both narrow money (M1) and broad money (M3). M1 consists of currency notes and coins with the public, demand deposits with commercial and cooperative banks and other deposits with RBI. M3 consists of M1 plus time deposits with banks and is also known as aggregate monetary resources. As on 31 March, 2003, the total M1 in India was Rs.4,72,827 crores and M3 was Rs 17,25,222 crores.
External Features of India’s Monetary System:
The external features of India’s present monetary system are the following:
1. Foreign Exchange Rate:
Since January 1976 with the signing of Jamaica Agreement, India is following the policy of floating exchange rates. According to this, the external value of Indian rupee is linked to a ‘basket’ of currencies of those countries with which India has large trade. This is the Nominal Effective Exchange Rate (NEER) of the rupee which is a weighted average of exchange rates vis-a-vis the currencies of India’s major trading partners.
Up to February 1993, India followed a dual exchange rate regime. According to it, the RBI fixed the exchange rates in terms of the various currencies such as dollar, pound, mark, yen, franc, rouble, etc. from time to time and all legal exchange transactions took place at the announced official rates.
In March 1993, India moved to a single market-determined exchange rate system. Under it, there is no officially fixed exchange rate of the rupee. Instead, the exchange rate is determined by the demand and supply conditions in the foreign exchange market. But the RBI intervenes only to maintain orderly market conditions and to curb excessive speculation.
2. Exchange Control:
In order to conserve foreign exchange, the RBI controls all foreign receipts and payments in the form of foreign currencies. It has an Exchange Control Department for this purpose. Foreign currencies coming into India are required to be sold and exchanged for the rupee either direct to the RBI or to its authorised dealers (ADs). Its authorised dealers include certain commercial banks, hotels, firms, shops, etc. which deal in foreign currencies and foreign travellers’ cheques.
They are also authorised to lend and borrow foreign currency among themselves in the inter-bank market locally. The actual lending limit for etch AD is fixed by the RBI depending upon the size of its operations and other relevant factors.
In March 1992, the RBI introduced the partial convertibility of the rupee in 60:40 ratio. This was the Liberalised Exchange Rate Management System (LERMS). Under this system, all foreign exchange receipts on current account transactions (i.e. exports, remittances, etc.) were required to be surrendered to the authorised dealers (ADs) in full.
The rate of exchange for these transactions was the free market rate quoted by the ADs. The ADs, in turn, surrendered to the RBI 40 per cent of their purchase of foreign currencies at the exchange rate announced by the RBI. They were free to sell the balance of 60 per cent of foreign exchange in the free market. All importers of goods and services and persons travelling abroad bought foreign exchange at market- determined rates from the ADs subject to liberalised exchange control rules.
In March 1994, full convertibility of the rupee on the entire current account transactions was introduced. Consequently, the RBI announced further relaxations in the exchange control regulations up to a specified limit relating to:
(a) Exchange earners foreign currency accounts;
(b) Basic travel quota;
(c) Studies abroad;
(d) Gift remittances;
(f) 100% export oriented units; and
(g) Payments of certain services rendered by foreign parties. Further relaxations in them are made from time to time in keeping with the foreign exchange position of the country.
3. Foreign Exchange Reserves:
Foreign exchange reserves with the RBI show the quantity of foreign currencies which can be utilised by the country for trade and other foreign transactions. The variations in foreign exchange reserves also show the balance of payments position of the country.
India’s foreign exchange reserves comprising foreign currency assets of the RBI, gold held by it, and SDR balances held by the Government stood at Rs. 3, 58, 280 crores at the end of March 2003.