Why can't RBI print unlimited notes ?
India’s retail inflation, measured by the Consumer Price Index (CPI) eased to 4.75% in May from 4.83% in April 2024.
Hello Friends,
Have you ever wondered why the Central Bank of India can’t keep printing currency notes to solve all the economic problems of the country? Well, it is not that simple as it sounds. Remember, every country has its central banking system which controls the money supply in the country with its monetary policy.
Printing additional money without a rise in economic output only increases the supply of money in circulation. This excess money leads to higher purchasing power which increases the demand for products in the economy. As a result of excess demand, the price of products rises leading to inflation. Printing more money and a rise in Inflation also leads to the depreciation of the value of Indian Currency (Rupee) in the International Market.
Reserve Bank of India decides the volume & value of notes to be printed each year based on GDP growth, Inflation, and several other factors.
Currency printing in India is done based on a Minimum reserve system. Under this system, the central bank must keep Rs 115 crore in gold and Rs 85 crore in foreign securities. Under the Minimum Reserve System, RBI can issue unlimited currency by keeping the reserve.
How does RBI issue new currencies?
To match liability, there should be equal volume of assets as well. The RBI secures assets while issuing new currency into the economy. The procured foreign currency and government bonds constitute the assets of the RBI whereas the newly issued currency is its liability.
Do you remember how hyperinflation destroyed Zimbabwe? A case of hyperinflation wreaking havoc in the economy causing widespread poverty. The Zimbabwe government printed additional money to pay for military actions and imported food to prevent hunger across the country. This caused prices to go up significantly leading to a situation of economic and financial crisis.
After peaking at nearly 557% inflation in late 2020, the Zimbabwean dollar has returned to a more modest, double-digit yearly inflation rate. But even today, the year-on-year inflation rate for April 2024, as measured by the all-items Consumer Price Index (CPI), was 57.5%.
So do you now understand how excess inflation can eat up the entire economy and why central banks cannot print excess money to speed up the economy?
See you soon.