Why can’t RBI print unlimited currency?
When the economy badly needs support in times of crisis, one question circulates like wildfire – “Why can’t the government ask RBI to print tons of money?” or, “Why can’t RBI print unlimited currency?” Well, this article delight attempts to answer.
Is printing more money good ? | Why can’t RBI print unlimited currency
First, you must know all major factors that plays behind printing of new currencies. These are :
Inflation
Inflation refers to a general rise in the level of prices. Don’t think of inflation in terms of higher prices for just one item or service, however. Inflation refers to the broad increase in prices across a sector or an industry, like the automotive or energy business—and ultimately a country’s entire economy. Unchecked inflation can topple a country’s economy, like in 2018 when Venezuela’s inflation rate hit over 1,000,000% a month, causing the economy to collapse and forcing countless citizens to flee the country.
Gross Domestic Product
In simpler terms, GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period, usually a year. GDP growth rate is an important indicator of the economic performance of a nation.
Minimum Reserve System
The Minimum Reserve System is the currency issue system followed by the RBI at present. The Minimum Reserve System which requires the RBI to keep a minimum reserve of Rs 200 crores comprising foreign currencies, gold coin and gold bullion (minimum of Rs 115 crore in the form of gold).
Soiled and Mutilated note
Soiled note means a note which has become dirty due to usage and includes a two-piece note pasted together wherein both the pieces presented belong to the same note and form the entire note. Mutilated banknote is a banknote, of which a portion is missing or composed of more than two pieces.
How much RBI prints money ?
The most simple formula for money printing is ;
Total Notes to be printed = D – N + R
D = The projected GDP figure is available from Govt, CMIE, and RBI’s own Research Wing
N = Cash with RBI and Banks -under Note stock account
R = Replacement demand due to the destruction of soiled and Mutilated note notes
In India, to meet the emergency, we add 5% extra.
Then denomination-wise breakup is taken for printing. A print order is given to printing presses and printed in 4 quarters, and remittances planned accordingly.
Disadvantages of printing more money | Why can’t RBI print unlimited currency?
RBI has the sole right to print currency and it can print as much currency notes as it wants just by maintaining a minimum reserves of rs200 crores of gold & foreign exchange. But printing more money will increase the amount of cash circulating in the economy. This leads to increase the demand for goods and services. Now if the economic output or the supply side fails to support demand, it may lead to a sharp rise in inflation. In turn, there will be a sharp increase in prices of existing goods and services as the demand will rise, but supply won’t. So it in turn causes to a sharp rise in inflation or hyperinflation ( read more https://en.wikipedia.org/wiki/Hyperinflation ) — something that could cause more harm than good. Germany faced such kind of problem of hyperinflation after the second world war when it tried to print more and more currency to pay off its debts. Hungary (1945) and Zimbabwe (2008) faced even more.
Also, currency value move towards a declination due to higher inflation. Now, the currency fluctuations can bring in investors or scare them away, and affects the economy heavily. These actions will put further downward pressure on the currency.
Final Takeaway : Why can’t RBI print unlimited currency
If RBI tries to print more money just for the sake of avoiding any crisis , it will completely hinder the equilibrium of demand & supply. The imbalance in demand & supply leads to hyper-inflation. Therefore, the printing of money should always match the total production of goods and services in the country, or else inflation can destroy the economy. The most important thing is that it is not the money which can lead to country’s development but the resources which can push the development.
Read also : How to select Monopoly Stocks to invest | Delivery Trading Strategy ( https://thebrightdelights.com/how-to-select-monopoly-stocks-to-invest-delivery-trading-strategy/ )