Anatomy of Indian Currency

The Reserve Bank of India (RBI) has the sole right to issue banknotes in India[1] and the RBI Act, 1934 precludes the issuance of currency notes by the Central Government[2] (which prior to coming into force of the Chapter III of the RBI Act, the Central Government could and did issue the currency notes). An overlap period was contemplated in the provisions during which time RBI would issue the currency notes of Government of India supplied to it by the Central Government, with all of the provisions of the RBI Act applying to such currency notes (unless otherwise provided).


Within RBI the issuance of banknotes is the preserve of the Issue Department, having a separate and distinct nature from that of other departments of RBI, including to the extent of specification that assets of the Issue Department shall not be subject to any liability[3] other than the liabilities expressed as an amount equal to the total of the amount of currency notes of Government of India and banknotes for the time being in circulation[4].


The independence is carried forward in terms of prohibition on issuance of banknotes to the Banking Department or to any other person except in exchange for other banknotes or for such coin, bullion or securities as are permitted by the RBI Act to form part of the reserves[5].


It is hence made clear that the banknotes are issued against (specified ratio or percentage of) assets held by the Issue Department, and free from any liability other than as specified. These are the reserves which underpin banknotes in circulation. The banknotes can be issued in exchange for specific types of financial or other assets. Hence, the often heard cries of currency just being printed ignore this fundamental aspect that financial or other assets need to be received against the issue of banknotes.


Accordingly, it will be of interest to see what assets the Issue Department is mandated to maintain as reserves for the banknotes it issues.

Such assets are to consist of: gold coin, gold bullion, foreign securities, rupee coin[6] and rupee securities.


The aggregate value of gold coin, gold bullion and foreign securities held as assets is required not to be less than Rs 200 crores, and aggregate value of gold coin and gold bullion so held is required to be not less than Rs 115 crores (thereby requiring foreign securities being held to be at least Rs 85 crores)[7]. The valuation of gold coin and gold bullion held is to be at a price not exceeding the prevailing international market price. Mere ownership of gold coin or gold bullion is not sufficient: RBI or its agencies are mandated to keep in its custody in India not less than seventeen-twentieth of such gold assets. If such gold is in any other bank, in the mint or treasury or in-transit can be regarded as part of the assets of the Issue Department.


The remainder of the assets of the Issue Department is held in rupee coin, Government of India rupee securities of any maturity, promissory notes drawn by NABARD (National Bank for Agriculture and Rural Development) for specified loans and advances[8], bills of exchange and promissory notes payable in India[9]. Rupee coin is valued at its face value and securities are valued at rates not exceeding market rates.


Foreign securities which may be held as part of the assets are also defined and specified. These include:

  • Securities of the following kinds payable in the currency of any foreign country which is a member of the International Monetary Fund (IMF), namely:
    • Balances with a bank which is the principal currency authority of that foreign country.
    • Any other balances or securities in a foreign currency maintained with or issued by IMF, World Bank (IBRD International Bank for Reconstrucion and Development), IDA (International Development Association), IFC (International Finance Corporation), ADB (Asian Development Bank) or the BIS (Bureau of Indian Standards).
    • Any other balances or securities in a foreign currency maintained with or issued by any banking or financial institution approved by the Central Government, provided they are repayable within a period of 10 years.
    • Bills of exchange bearing 2 or more good signatures and drawn and payable at any place in the foreign country (which is a member of IMF) and having a maturity not exceeding 90 days.
    • Government securities of the foreign country (which is a member of the IMF) maturing within 10 years.
    • Any drawing rights representing a liability of IMF.


These assets in essence underpin the banknotes, even if the banknotes are not exchangeable into such underlying assets. It is of course noteworthy that at a point in time, certain banknotes and currencies were exchangeable into pre-specified quantity or value of commodities or assets such as US $ or the Sterling Pound £ into gold, and which ceased to be so. It is from then on that the global financial system entered the era of fiat money.

It is also noteworthy that while the above provisions specify the type and nature of financial or other assets the Issue Department can hold, the Banking Department can hold far wider nature of financial or other assets[10].


The RBI Act goes on to specify the permissible denominations of banknotes[11] and the design, form and material of the banknotes[12].[13] RBI is also exempt from payment of any stamp duty in respect of banknotes issued by it.[14] Banknotes which are torn, defaced or excessively soiled are not permitted to be reissued.[15] In fact, the right of any person to recover the value of any lost, stolen, mutilated or imperfect currency notes or banknote from RBI or Central Government is precluded.[16] It is noteworthy that RBI can, with previous sanction of the Central Government, prescribe the circumstances in and conditions or limitations subject to which the value of such currency notes or banknotes may be refunded “as of grace”.[17]


The RBI Act also affirms the character of its banknotes as legal tender at any place in India in payment or on account for the amount expressed on the banknote, which is guaranteed by the Central Government.[18] This legal tender character means and implies that tendering of the banknotes discharges the payment liability to the extent of the denomination of the banknote, and that none can refuse to accept the same.


The RBI Act also contemplates issuance of special banknotes and special one rupee notes for use outside India (using the phrase “without India”).[19] The design, form and material of the special banknotes of specified denominations (of Rupees 5, 10 or 100) require approval of the Central Government after evaluating the Governor RBI’s recommendations. The one rupee notes can be as the Central Government thinks fit to adopt. These special banknotes or currency notes are not legal tender in India, and the provision was introduced to control the circulation of Indian banknotes and currency notes outside India[20].



Given that demonetisation has taken place three times in the country — 1946, 1978 and 2016 — it would be useful to understand the legal underpinning of demonetisation.


In terms of Section 26(2), the Central Government may, by notification, on recommendation of the Central Board of RBI, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.


As may be construed from the description of the savings clause, while the notified banknotes would cease to be legal tender, such banknotes would still be legal tender at such offices of RBI or its agencies and to such extent as notified. Hence, while the notified banknotes would need to be withdrawn from circulation and not utilised any further for payment obligations, the holders can seek due exchange of such notified banknotes for valid banknotes. The procedure or manner for exchange would be as per the notification.

In general, the notification would suffice for effecting demonetisation.


However, for several more reasons, a specific legislation has also been considered necessary. Hence, whether in 1946[21] 1978[22] or in 2016[23], an ordinance was promulgated and later replaced with an Act of the Parliament[24]. Such reasons include:

  • The extinguishment of:
    • RBI’s liability as expressed in the demonetised banknotes.
    • Central Government’s guarantee of the amounts expressed in the demonetised banknotes.
    • RBI’s obligation to exchange such demonetised banknotes for valid banknotes beyond a specified period (including a grace period).
  • Outlawing the possession, transfer or receipt of the demonetised banknotes (subject to certain exceptions).
  • penalties for:
    • misdeclarations or wrong declarations submitted at the time of exchange of the demonetised banknotes for valid banknotes; or
    • possession, transfer or receipt of demonetised banknotes.


There is also a view[25] that the obligation on RBI to provide rupee coins on demand in exchange for currency notes or banknotes tendered or to provide banknotes on demand in exchange for  rupee coins tendered[26] also requires being extinguished in respect of demonetised banknotes. With the extinguishment of RBI’s liability as expressed in the de-monetised banknotes and also its obligation to exchange demonetised banknotes beyond specified period, this could be a moot point.


Reasons for demonetisation have been usually linked to curbing black marketeers, curbing tax evasion, combating black money, combating counterfeit currency, and belief that demonetisation would flush out the hoarders of high denomination banknotes which are the veritable storehouse of illicit wealth.


The demonetisation efforts does not appear to have succeeded in achieving the above-mentioned objectives and instead created an artificial shock to the economy and the society, had a debilitating impact on daily wage earners and the poor, causing untold miseries for the ordinary folk and also had an adverse short to medium term impact on micro, small and medium enterprises (MSMEs) sector which operate on cash and carry basis for their products and for their raw material purchases and who also engage daily workers paid in cash (as they do not have bank accounts).[27]


There were also reports of widespread gaming of the demonetisation process through purchase of gold or other precious commodities or other consumables in demonetised banknotes (with applicable discount on value of such banknotes) or availing of services on a long-term basis by prepaying for the same in demonetised banknotes, compromise of weak links in the exchange process, and other infirmities in the demonetisation process. RBI took to issuing clarifications or further guidance on a daily basis to address issues encountered by the citizens, and while it did come in for a fair share of criticism, their responsiveness deserves appreciation (as more often than not, authorities stick to their position, rarely addressing issues immediately or clarifying the matters with promptitude).


Certain outcomes on the positive side include:

  • Bringing more accountability to cash holdings and the reduction in anonymity of cash transactions.
  • Ability to undertake data analytics of deposits made in the wake of demonetisation to identify potential tax avoiders or black money operators.
  • Increase in filing of suspicious transaction reports by financial intermediaries indicating that cash deposits made were not commensurate with the previously assessed profile of the customer, thereby shining a light on potential black money holdings.
  • Identification of shell firms suspected of being conduits for money laundering of demonetised banknotes.
  • Increase in the new income tax assesses and increase in future tax revenues with better tax compliance.
  • The surge in digital transactions and adopting of digital payments even for low value transactions.
  • Inflows into mutual funds and insurance companies promoting more formalisation of the economy and financialisation of savings.

Future forward

Statutory framework for currency and coinage is rarely revisited. What is noteworthy is that in 2011, India did update the Coinage Act and repealed five legislations (including four pre-independence legislations). India is again at a critical juncture vis-à-vis currency, especially as RBI is contemplating launching pilots to test Indian digital rupee, as a CBDC — central bank digital currency[28]. A successful pilot would signal a launch and availability of the Indian digital rupee for use in wholesale or retail sphere or both.


In the past couple of years, the Indian Government has mooted bills[29] that, inter alia, permit the issuance of official digital currency. The relevant provisions of the 2019 Bill contemplate that the Government of India, in consultation with RBI, may issue digital rupee as legal tender. RBI may also notify a digital currency recognised as legal tender in a foreign jurisdiction, as a foreign currency.


In keeping with the provisions of the RBI Act dealing with currency notes, the legislation for Indian digital rupee will need to specify the nature and extent of reserves that will be maintained by the Issue Department of RBI for the Indian digital rupee. Given the dual nature of Indian digital rupee  — wholesale and retail – being taken forward for pilot,  there may also be a requirement for provisions that distinguish the treatment in wholesale and retail usage respectively. Measures for addressing the risks of digital fraud and of ensuring cybersecurity will also be required to be specified.

All in all, an interesting period ahead for India and the Indian public.


 Pramod Rao, Group General Counsel at ICICI Bank. Views are personal.

[1] Reserve Bank of India Act, 1934, S.22(1).

[2] Reserve Bank of India Act, 1934, S. 22(2).

[3] Reserve Bank of India Act, 1934, S. 23(1).

[4] Reserve Bank of India Act, 1934, S. 34.

[5] Reserve Bank of India Act, 1934, S. 23(2).

[6] The Coinage Act, 2011 governs the rupee coins and replaced the Metal Tokens Act, 1889, the Coinage Act, 1906, the Bronze Coin (Legal Tender) Act, 1918, the Currency Ordinance, 1940, and the Small Coins (Offences) Act, 1971.

[7]  Vide S. 37, only with the previous sanction of Central Government for period not exceeding 6 months in the first instance and thereafter with similar sanction, for further periods not exceeding 3 months at a time, can RBI hold foreign securities less than this value.

[8] Specified in S. 17(4-E) of the Reserve Bank of India Act, 1934.

[9] As are eligible for purchase by RBI under Ss. 17(2)(a), (b) or (bb) or under S. 18(1) of the Reserve Bank of India Act, 1934.

[10] See following news reports on RBI exploring investments beyond traditional instruments: See HERE, <HERE> and <HERE> (behind a paywall) and see here for a contrarian perspective: <HERE>.

[11] S. 24 of the RBI Act: Bank notes shall be of denominational values of Rupees 2, 5, 10, 20, 50, 100, 500, 1000, 5000 and 10,000 or of such denominational value not exceeding Rs 10,000 as Central Government may specify on the recommendation of RBI Central Board.

[12] S. 25 of the RBI Act: Central Government has to approve the same after considering the recommendations of RBI Central Board.

[13] See Here for the designs and form of banknotes issued across various denominations over the years.

[14] Reserve Bank of India Act, 1934, S. 29.

[15] Reserve Bank of India Act, 1934, S. 27.

[16] Reserve Bank of India Act. 1934, S. 28.

[17] Reserve Bank of India Act, 1934, S. 28, proviso.

[18] Reserve Bank of India Act, 1934, S. 26.

[19] Reserve Bank of India Act, 1934, S. 28-A.

[20] The Reserve Bank of India Bill, 1959.

[21] High Denomination Bank Notes (Demonetisation) Ordinance, 1946 .

[22] High Denomination Bank Notes (Demonetisation) Act, 1978

[23] Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016.

[24] While the 1946 Ordinance was not followed up with an Act, the Supreme Court in Hansraj Moolji v. State of Bombay, AIR 1957 SC 497, in light of amendment made by the India and Burma (Emergency Provisions) Act, 1940 to S. 72 of the Ninth Schedule to Government of India Act, 1935 (that limited the life of ordinances to six months) noted that such amendment had the effect of treating all ordinances promulgated during such emergency as equivalent to legislations passed by the Indian legislature without any limitation of time; separately, in 1956 S. 26-A was added to the RBI Act which states “Notwithstanding anything contained in S. 26, no bank note of the denominational value of five hundred rupees, one thousand rupees or ten thousand rupees issued before the 13-1-1946, shall be legal tender in payment or on account for the amount expressed therein” to lay to rest any further controversy.

[25] See <HERE>; this article provides an excellent overview of judicial decisions concerning the 1946 and 1978 laws on demonetisation and propounds the view on obligation under S. 39 requiring negation vide an ordinance or an act. See also <HERE> regarding demonetisation not being valid without an ordinance or legislation for demonetisation.

[26] Reserve Bank of India Act, 1934, S. 39(1).

[27] Here is a historical retrospective comparing the impact of 1946 and 2016 demonetisation: <HERE>; also see <HERE> and <HERE.

[28] See here for comments and discussion on CBDC by RBI Governor and Deputy Governors: <HERE> (Edited Transcript of Reserve Bank of India’s Monetary Policy Press Conference: 8-12-2021).

[29] See here for the earliest version of the Bill: Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, the latest version is yet to be released by the Government.


  • Thank you sharing for this great post.

  • A very informative and precise note that gives us a good understanding of the legal basis and framework that Indian currency is issued and used. Something that should be an essential reading for bankers and finance professionals.

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