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Unit 9: Indian Currency System

9.8 Summary Notes

India is a developing country and so as the economy of India.

The Indian currency system should be kept in mind so that India get benefit at every point
of time.
Convertibility of Rupee – current and capital account has put a light on the Value of
money presently.

Money multiplier and its importance had been discussed and understood very well.

9.9 Keywords

Capital: Financial assets or the financial value of assets, such as cash.
Definition of ‘Debt Security’: Any debt instrument that can be bought or sold between two
parties and has basic terms defined, such as notional amount (amount borrowed), interest rate
and maturity/renewal date. Debt securities include government bonds, corporate bonds, CDs,
municipal bonds, preferred stock, collateralised securities (such as CDOs, CMOs, GNMAs) and
zero-coupon securities.

Demonetisation: Demonetisation is the act of stripping a currency unit of its status as legal
tender.
Domestic Credit Expansion: The part of any increase in the money supply which is not due to a
balance-of-payments surplus. The money supply can increase through a balance-of-payments
surplus, on either current or capital account. This leads to a rise in foreign exchange reserves and
a corresponding increase in base money if this is not sterilised by the monetary authorities.
Alternatively, the money supply can rise through lending by the banking system to either the
state or the private sector. This extra internal bank lending is domestic credit expansion.
Foreign-exchange Reserves: These are the foreign currency deposits held by central banks and
monetary authorities.

IMF: The International Monetary Fund (IMF) describes itself as “an organization of 188 countries,
working to foster global monetary cooperation, secure financial stability, facilitate international
trade, promote high employment and sustainable economic growth, and reduce poverty around
the world.”

Open Market Operations – OMO: The buying and selling of government securities in the open
market in order to expand or contract the amount of money in the banking system. Purchases
inject money into the banking system and stimulate growth while sales of securities do the
opposite.

9.10 Review Questions

1. Define money multiplier.
2. Explain Reserve Money.

3. Write a short note on the Indian currency system.
4. What is the role of the RBI in the regulation of the money in India?
5. What do you mean by the capital account convertibility and current account convertibility?

6. Describe the Foreign Exchange Reserve.

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