CURRENCY PRINTING &

CREATION

SARTHAK MEHROTRA 2015B3A3361G

SHUBHRANSH JAGOTA 2015B3A7348G
PALASH CHATURVEDI 2015B3A7395G
AASHISH AGARWAL 2015B3A8411G
D S ARAVIND 2015B3A8531G
 Money has been used as a tool of
sovereignty for centuries.
When US won independence from Britain,
the first article of the new constitution
gave Congress the exclusive right to print
money.
Value of currency was tied to gold in
government vaults.
1781- 1907 US financial system-
economic petri dish
 THE FEDERAL RESERVE
In1913- a permanent central bank, the
Federal Reserve, was established.
Function- Expand or contract supply of the
dollar. The value of which was tied to Gold.
This was done to promote monetary
stability.
 THE GREAT DEPRESSION
AND THE GOLD RESERVE
ACT- 1934
The great depression of 1929 had a
profound effect on economies worldwide.
The US financial system had printed nearly
all the money it legally could to spark the
economy back to life and Gold was needed
to print more.
 1933- Roosevelt ordered all US citizens to sell
their gold to the government at a fixed price or
go to jail.
Price of Gold revised from $20.67 to $35 per
ounce and this lead to foreign investors and
countries selling their Gold to the US.
This resulted in a flow of Gold into the US and
the spread of the dollar across the globe.
 Bretton-Wood System
After WW2, the US emerged as the worlds
military and financial superpower and the dollar
was considered the most stable currency in the
world.
The US owned more than half the worlds Gold
reserves.
The US initiated the Bretton-Wood System by
which it dollarized the whole world economy.
 Bretton Woods System was a Gold Exchange
Standard.
The USA was to maintain the price of Gold fixed
at $35 per ounce & be ready to exchange on
demand $s for gold & vice versa.
Other nations were to fix the price of their
currencies in terms of $ and by default, in Gold
 In the next few decades more dollars flowed
out of the US
Governments started producing more of their
currency and started debasing their coins by
minting them with cheaper metals.
They also started printing more than they had
Gold in their vaults.
 However, from 1950 to 1969, as Germany and
Japan recovered, the US share of the world's
economic output dropped significantly, from
35% to 27%.
The fiscal strain of federal expenditures for
theVietnam War and persistent balance of
payments deficits lead to lack of faith in US
economy.
France reduced its dollar reserves, exchanging
them for gold at the official exchange rate,
reducing US economic influence
 VALUE OF THE DOLLAR
By 1966, countries stopped selling their Gold to
the US in exchange for dollars.
They had more money in dollars than the US had
Gold in their vaults.
They started redeeming the dollars in their
possession for Gold.
This lead to a debate about the actual value of
Dollar.
 All these events lead to U.S. PresidentRichard
Nixonending international convertibility of the
U.S. dollar to gold on August 15, 1971.Now no
one could legally convert dollar into gold or any
other asset.
 Present system to
determine the currency
values
Now the system used to determine the value is
called FIAT System.
In this type of system the currencies trades against
one another.
Currency , like equities(stocks),bonds , securities
and other financial instruments , is in fact floated in
markets(commonly called Forex Markets ).
 Operation of the Present
System
Since March 1973 the international monetary
system has shifted to Floating Exchange Rate
System.
Jamaica Accord 1976 formally recognized the
manage floating rate system. Ratified in 1978
April.
Under this system, Nations Monetary
Authorities are entrusted to intervene in FOREX
Market to smooth out short-run fluctuations in
exchange rates.
That is the emergence of Multiple Currency
Centre in the international monetary system.
 Factors affecting the value of the
currency
Direct factors:

1. Thenet forex inflow( due to Indian demand ) vs net forex outflow (

FIIs buying Indian currency to invest in India)
2.Important global commodities like Oiland their trends as well as
prices of heavy machinery including defence . ( Remember that India
imports 70% of its oil)
3.Policy decisions ( both Fiscal and monetary) by Government-
an important example where Government directly controls the value of
its currency is China
4. Impact of global treaties, sanctions, bilateral agreementsetc
if any

Indirect factors:
1.Investor sentiment- Currently sentiment about India is bad due to
the perception that Indian Government may change policies in a way
that is detrimental to the foreign investors ( case in point: vodafone , FDI
in retail etc)
2.Global economic scenario- Flight of capital to supposed 'safe'
destinations is happening globally, and India is on the wrong side of it.
3.Performance of critical sectors of the economy- Agriculture,
 Currency printing and
creation(Today)

There are two types of money in a fractional-

reserve banking system: currency originally
issued by the central bank, and bank
deposits at commercial banks.

Reserve Money(M0):Currency in circulation

+Bankers deposits with the RBI Other
deposits with the RBI

Narrow and Broad Money(M1,M2 etc):This is

the sum of deposits with the commercial
banks along with the reserve money.
 Currency printing and
creation(Today)
Fractional Reserve Banking System

Commercial banks have to maintain a

fraction of their deposits with the RBI.

Eg:A deposits Rs 100 with Bank_1.Bank_1

maintains a reserve of (say10%) with RBI
and lends the rest to B who deposits Rs 90
with his Bank_2 which lends Rs 81 to C and
so on.
 Currency printing and
creation(Today)

This way money is created by the commercial

banks. This affects M1,M2 etc which take this
'virtual money' into account

Therefore in a fractional banking system money

can be created by the central bank(RBI) or the
commercial banks.

RBI creates money through various instruments.

Currency printing and
creation(Today)
Currency printing and
creation(Today)
 Currency printing and
creation(Today)

Money supply(M0) as of 30th

September,2016=15972.5 (billion INR)

Money supply(M3) as of 30th

September,2016=116176.2(billion INR)

Multiplier Factor=M3/M0=7.3
 Currency printing and
creation(Today)

RBI instruments to control money flow in the

economy:
Repo and reverse repo
Open market Operation
Bank rate
CRR (Cash reserve ratio)
SLR (Statutory liquidity ratio)
MSF (Marginal Standing Facility )
 Currency printing and
creation(Today)

What is the role of the Reserve Bank in currency

management?

The Reserve Bank manages currency in India. The

Government, on the advice of the Reserve Bank,
decides on the various denominations. The Reserve
Bank also co-ordinates with the Government in the
designing of bank notes, including the security features.
The Reserve Bank estimates the quantity of notes that
are likely to be needed denomination-wise and places
the indent with the various presses through the
Government of India. The notes received from the
presses are issued and a reserve stock maintained.
Notes received from banks and currency chests are
examined. Notes fit for circulation are reissued and the
others (soiled and mutilated) are destroyed so as to
maintain the quality of notes in circulation. The Reserve
Currency printing and
creation(Today)

How does the Reserve Bank estimate the demand

for bank notes?

The Reserve Bank estimates the demand(by using

statistical models) for bank notes on the basis of
3 indicators:

growth rate of the economy and infllation

the replacement demand

reserve requirements
 Currency printing and
creation(Today)
Currency creation vs Inflation

When there is an increase in supply of money the

prices of goods and services rise(rate of inflation
increases).

What does our monetary policy say about inflation?

The Agreement on Monetary Policy Framework

between the Government and the Reserve Bank of
India dated February 20, 2015 defines the price
stability objective explicitly in terms of the target
for inflation as measured by the consumer price
index-combined (CPI-C) in the near to medium-
term, i.e., (a) below 6 per cent by January 2016,
and (b) 4 per cent (+/-) 2 per cent for the financial
year 2016-17 and all subsequent years.
 Currency printing and
creation(Today)
Currency Creation vs Growth Rate

Velocity of money: V=P*Q/M

P=Avg Price of all the goods and services sold

during the year

Q= Quantity of assets, goods and services sold

during the year.

M=Total dollars in the country's money supply.

RBI monitors the growth rate(GDP) and the money

supply(M) and issues currency(or uses other
instruments) to meet the equilibrium demand.
 Currency printing and
creation(Today)

Replacement demand:

RBI issues new currency depending on how

much money leaves the money supply because
of soiled notes and counterfeit notes to maintain
money demand equilibrium.
Currency printing and creation(Today)

Currency Reserve Requirements

As per minimum reserve system, for issuing any

amount of notes, the Issue Department has to
maintain an overall minimum reserve of Rs. 200
crore, of which the gold reserve should be of
minimum value not less than Rs. 115 crore and the
balance of Rs. 85 crore can be maintained in terms
of foreign currencies, which may be even reduced
in times of necessities with the permission of the
government.

These reserves are bascially the assets tied to the

currency issued by RBI.
 Currency printing and
creation(Today)
Global Economy aspect:

Managed float regime is the current international

financial environment in which exchange rates
fluctuate from day to day, but central banks attempt
to influence their countries' exchange rates by buying
and selling currencies. It is also known as a dirty float.
Why cant governments print
any amount money ?
Hyperinflation
Hyperinflation
Hyperinflation is extremely
rapid or out of control
inflation. There is no precise
numerical indication of
hyperinflation. It is a
situation where the price
increases are out of control
that the concept of inflation
is meaningless.

35 quadrillion Zimbabwean
dollars where equal to 1
USD, as a result of
hyperinflation which hit the
country in 2009.
 Counterfeit Money

Counterfeit moneyis imitation currency

produced without the legal sanction of the
state or government.
Producing or using counterfeit money is a
form
offraudorforgery.
How Does Counterfeit Money Affect
the Economy and Society?

The presence and use of counterfeit money in the

market(s) can affect the national and global
economy in a considerable manner.
It deceives people and they tend to lose confidence
in their money and their nation's economy

Circulation of counterfeit currency can have the

following adverse effects on the economy :
Devaluation of Currency and Inflation

As counterfeit money makes its way into the markets,

suddenly there is more money in circulation than there
should be.
Owing to this, the purchasing power of people increases
and there is a rise in the demand for goods and services.
Then, since supply cannot meet the demand, shortage of
goods occurs, which in turn, leads to the rise in prices, i.e.,
inflation.

Now, people have to pay more money for purchasing the

same amount of goods. This is called 'currency
devaluation'.
 Black Marketing
The shortage of supply that is created in the market due to
extensive circulation of forged currency, gives rise to
another grave problem, that of black marketing.
Goods and services, which should be made available to
people at established and reasonable rates, are sold,
illegally, at elevated prices.
Owing to this, only the select few can afford to buy
commodities.
It is called 'black market' because all the transactions are
essentially made in cash and are always off the record.
Sometimes, commodity shortages are purposefully created
so that more amount of cash can be exchanged and still go
unaccounted.
Non-reimbursement by Banks
This is one of the elementary issues that is
associated with the circulation of counterfeit
currency in the economy.
When the banks are informed about fake
currency being involved in some significant
business transactions, it is confiscated with
immediate effect, but most of the time, the
businesses do not get reimbursement for their
money.
This leads to heavy losses that may affect them,
either immediately or in the long run.
 Loss of Public Confidence

People tend to lose faith in the economy of

their country and the money that they hold.
So, in order to avoid any kind of encounter
with counterfeit money, they may start
making demands of their payments to be
made in some other, more stable currency.
This further destabilize the country's overall
economy.
 Counterfeit Money in India

How big is the fake currency problem?

According to a study conducted by the Indian
Statistical Institute, as many as 250 out of every
10 lakh notes in circulation are fake.
Typically, at any point in time, banknotes with a
face value of Rs 400 crore are in circulation in the
country.
The study revealed that fake currency notes with
a face value of Rs 70 crore are infused into the
system every year, and law enforcement agencies
are able to intercept only a third of them.
 How do these notes find their way to India, and who
profits from them?

Pakistans military spy

agency, the Inter-Services
Intelligence (ISI), has been
raking in an annual profit
of around Rs 500 crore by
circulating counterfeit
notes in India
Other than Pakistan,
Dubai, Bangladesh and
Nepal are also a major
source of counterfeit
money in India
 What has the government done to
tackle this problem?

The government has formed a special Fake

Notes Co-ordination (FCORD) Group in the
Home Ministry to share Fake Indian Currency
Notes (FICN) information with security
agencies of states and the Centre.
It has also constituted a Terror Funding &
Fake Currency Cell (TFFC) in the National
Investigation Agency to investigate terror
funding and fake currency cases.
Apart from this, the government in August
2015 signed an MoU with Bangladesh to
prevent the counter-smuggling and circulation
Know your note
 See through Register
The floral design printed both on the front
and reverse in the middle of the vertical
band next to the watermark window has the
denominational numeral "1000". Half the
numeral is printed on the front and half on
the reverse. Both the printed portions have
an accurate back to back. Registration so
that the numeral appears as one when
viewed against light.
Watermark

The portrait of Mahatma

Gandhi, the multi-directional
lines and an electrotype mark
showing the denominational
numeral "1000" appear in this
section and these can be
viewed better when the
banknote is held against
light.
Optically Variable Ink (OVI)

The colour of the numeral 1000 appears

green when the banknote is held flat but
would change to blue when the banknote is
held at an angle. The font size is reduced.

Fluorescence
Fluorescence Number panels of the banknote are
printed in fluorescentink. The banknote has optical
fibres. Both can be seen when the banknote is
viewed under ultraviolet light.

Security Thread
Banknote of 1000 Indian rupee contains 3 mm wide
security thread with inscriptions "bharat", "1000" and
"RBI" and colour shifts from green to blue when viewed
from different angles. It will fluoresce in yellow on the
reverse and the text will fluoresce on the obverse under
ultraviolet light. The thread is visible as a continuous line
from behind when held up against light.
Latent Image

The vertical band on the right side of the note of 1000

Indian rupee contains latent image showing the numeral
1000 when the banknote is held horizon-tally at eye level.

Identification mark
Diamond with intaglio print on the left side of the 1000
Indian rupee, which can be felt by touch, helps the visually
impaired to identify the denomination.
Year of printing

Year of printing appears on the reverse of

the banknote.
Thank
you!