The Reserve Bank of India issues notes under which of the following methods?

Question

Accepted Answer

The correct option is 4: Minimum reserve system.

The Reserve Bank of India (RBI), which is India's central bank, uses the Minimum Reserve System (MRS) for the issuance of currency notes. This method was adopted in 1956, replacing the earlier Proportional Reserve System. Under the MRS, the RBI is required to maintain a minimum reserve of assets worth ₹200 crores at all times, of which at least ₹115 crores must be in gold and the remaining ₹85 crores in foreign securities. Once this minimum floor is maintained, the RBI has the freedom to issue any amount of currency based on the economy's requirements. This system provides the RBI with flexibility in managing the money supply to meet the demands of economic growth while still ensuring a base level of convertibility and trust in the currency.

The incorrect option is 1: Fixed fiduciary system.
Under the Fixed Fiduciary System, a central bank is allowed to issue a fixed amount of notes without any gold or foreign reserve backing, and any note issuance beyond this limit must be fully backed by reserves. This system offers no flexibility for currency expansion based on economic needs.

The incorrect option is 2: Maximum fiduciary system.
In the Maximum Fiduciary System, there is a legal ceiling on the maximum amount of notes that can be issued without metallic backing, but the total amount of notes issued may not exceed a certain maximum limit. This system restricts the central bank's ability to respond to increasing demand for money in a growing economy.

The incorrect option is 3: Proportional reserve system.
The Proportional Reserve System, which India previously used, requires the central bank to maintain a certain percentage of the total note issue in the form of gold and foreign securities. This method restricts the ability of the RBI to expand the money supply significantly during periods of high economic growth because a corresponding increase in reserves would be required.