Printing currency in India | Basis of printing currency in India


Recently I have read one of the most stupid comments about making people of India rich."Bring back the money from Swizz Bank and distribute the same to all Indians. Let them live happily forever!!" In one shot, it seems to a great idea to get rid off all sufferings of the people,but on detailed analysis, we can come to a conclusion that it could destroy the foundation of Indian Economy. It creates inflation,hyper-inflation in the country and makes its currency good for nothing. Let us see how printing money and distributing it can create macroeconomic problems in a country and on what basis a country prints money.

Who prints money in India?
Normally the central bank manages the currency in a country. In India RBI manages it with the advise of Government of India. The Reserve Bank derived its role in currency management on the basis of the Reserve Bank of India Act, 1934. RBI has authorised selected branches of banks called Currency chests, to facilitate the distribution of notes and rupee coins.The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.

Can India decide to print additional currencies to meet public expenditure?
Absolutely yes.But we cannot do that.We are suppose to do that only at the time of extreme financial crisis. You may be aware of the term used for that - Quantitative easing.It refers to the actions by Central Banks that create liquidity in the economy by printing money. This is usually used by central banks after they fail to inject liquidity in the economy by lowering interest rates. Its a tool to prevent deflation. Printing money causes inflation in an economy, and if you print too much money you can get hyper–inflation. 

Basis of printing currency in India
The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models. The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.

How printing money causes inflation
Demand and Price : Demand of a product is related to its price. if price is less, there would be more demand.Had the price of a Sony LED TV was Rs1000, I would have gone for that!!. So if you plot a simple graph with price and demand, you can see that its a downward sloping curve.

Supply and Price : If the price is high, the supply in the market would be also high. What if someone offers Rs.300000 for your 92 model maruthi 800? No second thought right?. So if you plot a simple graph with price and supply, you can see that its a upward sloping curve.

Price of a Product : The price and quantity of goods and services in the marketplace are largely determined by (a) consumer demand and (b) the amount that suppliers are willing to supply. In simple terms, the price of a product is the intersection point of these two curves. If the price of a product rises above the intersection, its inflation and the opposite scenario is called deflation.

So what if I get 1crore from Government of India as my part from Swizz money?. Well I don't mind even keeping a 1 lakh worth LED TV in my bathroom. I don't care about rising price at all. Just think about the same scenario for all Indians. Then price of the 5 rupee worth tea will shoot up to 50 or more!!. An epitome for this example is what happened in Zimbabwe. In Zimbabwe 3 eggs cost 100 billion Zimbabwe dollars!!!. 

To conclude, printing money and distributing is not the way for a nation to become richer. The ideal strategy would be to produce cheaper goods and enhance exporting capabilities.

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