Currency System In India

Historical Background

• The first gold coins were made during the Gupta dynasty, which ruled from 390 to 550 AD.
  

• The rupee was first minted in India around 1542 AD during the reign of Sher Shah Suri. It was a silver coin. In 1873, the price of silver dropped in the global market, causing the silver coin to lose its value as a metal. Before 1873, the Indian rupee was worth ₹10 for every pound sterling.
  

• In 1882, the British government introduced paper money in India.
  

• In 1935, the Reserve Bank of India was established, making the Indian rupee an independent currency. However, for exchange purposes, it still depended on the pound sterling.
  

• In 1947, India joined the International Monetary Fund, and the value of the rupee was set according to IMF standards.
  

• In 1957, the Indian Coinage (Amendment) Act changed the Indian currency system to a decimal system. The old system of rupees, annas, and paise (1 rupee = 16 annas and 1 anna = 12 paise) was replaced by the rupee and paise system. The first 1 paise coin was introduced.

Issuance of Indian Currency

• The Indian government issues all coins and ₹1 notes.
  
• The Reserve Bank of India (RBI) issues currency notes above ₹1 denomination.<>
• The current series of currency notes, called the Mahatma Gandhi Series, began in 1996.
• Currency notes of denominations ₹1, 2, 5, 10, 20, 50, 100, 500, and 1000 are in circulation.
• The RBI distributes and manages all currency on behalf of the Indian government.

Demonetization of Currency

• Demonetization means taking money out of circulation. It’s done to get rid of black market money and money that people haven’t reported to the government. It’s happened twice in India.
• The first time was in 1946. They got rid of all the ₹100 notes and higher. Then, in 1978, they got rid of the ₹1000, ₹5000, and ₹10,000 notes.

Devaluation of Currency

• Devaluation means making the Indian rupee worth less compared to the US dollar in the world market.
• In 1947, India joined the International Monetary Fund. This meant they had to set the value of the rupee based on IMF rules. Because of this, India had to devalue the rupee.
• Here are the times the rupee was devalued:
• The first time was in June 1949.

Indian Rupee Devaluation:

• The Indian rupee lost value compared to other currencies.
• The first devaluation happened when Dr. John Mathai was the finance minister. The rupee lost 30.5% of its value.
• The second devaluation occurred in June 1966, and the rupee lost 57% of its value. Sachindra Chaudhury was the finance minister at that time.
• The third devaluation took place on 1 July 1991, and the rupee lost 9% of its value. On 3 July 1991, it was devalued again by 11%, making a total devaluation of 20%. Dr. Manmohan Singh was the finance minister during this period.
• Since 20 August 1994, the rupee has been freely convertible for current account transactions.

Development of Banking System in India:

• The first bank managed by Indians was the Oudh Commercial Bank, established in 1881.
• It was a bank with limited liability.
• During the British rule, many institutions engaged in banking activities as agency houses, combining banking with their trading businesses.
• The Punjab National Bank was the second Indian bank to be established in 1884.
• The Swadeshi Movement started in 1906, and many commercial banks were created during this time.
• In 1921, three big banks in India merged to form the Imperial Bank of India because they were having financial problems.
• In the 1940s, people realized that commercial banks needed to be regulated and controlled. So, in January 1946, the first banking law, called the Banking Companies (Inspection Ordinance) Act, was passed. Then, in February 1946, another law called the Banking Companies (Restriction of Branches) Act was passed.
• In 1949, the Banking Companies Act was changed and renamed the Banking Regulation Act.
• In 1993, the government allowed new private banks to be set up in India. They did this because they thought more competition would make the economy more efficient and competitive. But new banks had to follow certain rules:
• They had to be registered as public limited companies.
• The bank should have a minimum paid-up capital of over ₹100 crore.
• Its shares should be listed on the stock exchange.
• The bank’s headquarters should ideally be in a location where no other banks have their main offices.
• The bank must follow the Reserve Bank of India’s (RBI) rules and regulations for banking operations, accounting, and other policies.
• From the start, it must have a minimum capital adequacy of 8%.
• In December 1997, the Indian government formed another high-level committee led by M. Narasimham to assess how well the financial system reforms suggested in 1991 had been carried out.
• The committee was also tasked with examining the current state of affairs and suggesting changes that would strengthen the banking system and better prepare it to compete in the global economy.
• The committee gave its report in April 1998.

The Indian Financial System’s Origins

• During British rule in India (1757-1947), important components of the Indian financial system were established.
• The rupee, India’s national currency, was already widely used domestically and even circulated internationally, particularly in the Persian Gulf region, prior to independence.
• Foreign banks, primarily British and a few from other parts of the British Empire like Hong Kong, offered banking and other financial services.
• However, this colonial banking system was primarily focused on foreign trade and short-term loans, and its operations were concentrated in major port cities.

Establishment of the Reserve Bank of India

• On April 1, 1935, the Reserve Bank of India was established as a privately owned bank with only 5% of its shares held by the Government of India. Its share capital was set at ₹5 crore, which remains unchanged to this day.
• The bank was initially structured as a shareholder institution, modeled after prominent foreign central banks of the time.
• The Reserve Bank of India’s initial share capital of ₹5 crore was - The bank’s total capital was divided into 5,00,000 shares, each worth ₹100.
• In the beginning, all the shares were owned by private individuals, except for 2,200 shares that were given to the Central Government.
• In February 1947, the decision was made to make the bank government-owned.
• According to the Reserve Bank of India (Transfer to Public Ownership) Act 1948, all the shares were considered to have been transferred to the Central Government.
• From January 1, 1949, RBI became a government-owned institution.
• The 1948 Act gave the Central Government the power to give the bank any instructions it thought were necessary for the public good.