Explain Central Bank's function as currency authority.
The central
bank is given the sole monopoly of issuing currency in order to secure control
over volume of currency and credit. These notes circulate throughout the
country as legal tender money. It has to keep a reserve in the form of gold and
foreign securities as per statutory rules against the notes issued by it.
It may be
noted that RBI issues all currency notes in India except one rupee note. Again,
it is under the directions of RBI that one rupee notes and small coins are
issued by government mints. Remember, the central government of a country is
usually authorised to borrow money from the central bank.
When the
central government expenditure exceeds government revenue and the government is
unable to reduce its expenditure, then it borrows from the RBI. This is done by
selling security bills to RBI which creates new currency notes for the purpose.
This is called monetisation of budget deficit or deficit financing. The
government spends new currency and puts it into circulation to meet its
expenditure.
The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money. It has to keep a reserve in the form of gold and foreign securities as per statutory rules against the notes issued by it.
It may be noted that RBI issues all currency notes in India except one rupee note. Again, it is under the directions of RBI that one rupee notes and small coins are issued by government mints. Remember, the central government of a country is usually authorised to borrow money from the central bank.
When the central government expenditure exceeds government revenue and the government is unable to reduce its expenditure, then it borrows from the RBI. This is done by selling security bills to RBI which creates new currency notes for the purpose. This is called monetisation of budget deficit or deficit financing. The government spends new currency and puts it into circulation to meet its expenditure.
