Question

RBI extends Currency Swap Arrangement with SAARC nations to enhance economic cooperation and strengthening financial stability among the SAARC countries. Which of the following statement is not correct?

• A. A currency swap involves exchange of principal and interest in one currency for the same in another currency.
• B. Under the arrangement, RBI will be offering swap arrangement up to an overall amount of US 2 billion dollars both in foreign currency and Indian rupee.
• C. RBI has the sole right to issue all the currency notes
• D. Paper currency is not convertible into the precious metal (gold) that is backing it.

Answer 1

The correct option is C

RBI has the sole right to issue all the currency notes

(source : NCERT and internet)

RBI has the sole right to issue currency notes, other than the one rupee note in the country. The Government of India under the Indian Coinage Act issues the one rupee note and all coins. Though the Government issues the one rupee note and coins, the responsibility for putting them in circulation rests with the RBI.

The system governing note issue in India is the Minimum Reserve System. Paper currency is not convertible into the precious metal (gold) that is backing it; hence the currency is said to be inconvertible.

Extra information: Currency swap agreement is considered to be a foreign exchange transaction.

Suppose a US based company needs to acquire Indian Rupees and India-based company needs to acquire US dollars. Then these two companies could arrange to swap currencies by establishing an interest rate, agreed upon amount along with a common maturity date for the exchange.