RBI completes 75 years of its ‘promise to pay’

Once upon a time in India, banks were free to issue their own bank notes, cheques and there were no or few restrictions on capital reserves too. There was free entry and exit of banks.  This ‘free banking’ era ended in 1861 when the Paper Currency Act came into force, giving the government the monopoly of issuing bank notes in India.

Bank notes were promissory notes that were payable to bearer on demand and were convertible into the current coin of the region.

The promissory clause printed on the banknotes (I promise to pay the bearer amount X) that is found even in modern currency notes is a statement, which means that the banknote is a legal
tender for a certain amount. The obligation on the part of the bank is to exchange a banknote for coins of an equivalent amount.  

Currently, the Reserve Bank of India Act, 1934 has provisions to issue notes of denominations up to Rs 10,000. The government, on the advice of the Reserve Bank, can decide on various denominations of bank notes to be issued. At present, notes are issued in denominations of Rs 5, Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1,000. While as per the provisions of the Coinage Act, 1906, coins can be issued up to a denomination of Rs 1,000.
With time, however, notes of smaller denominations were converted into coins as they constituted higher proportion of notes in circulation in terms of number while accounting for a lower value.

But why is the RBI important for you? “The Reserve Bank of India came into existence 75 years ago on April 1, 1935 “to regulate the issue of bank notes and maintaining reserves with a view to securing monetary stability in India and to operate the currency and credit system of the country to its advantage,” says the RBI’s Preamble.

Though originally privately-owned, the Reserve Bank of India became fully-owned by the government, post nationalisation in 1949. 2009-10 was celebrated as the Platinum Jubilee year for RBI to commemorate 75 years of its ‘promise to pay’.