Minimum Reserve System (MRS): Meaning and Objectives
The Reserve Bank has monopoly to issue currency notes of all denominations except one rupee notes. Since the one rupee note issued by the Ministry of Finance but distributed by the RBI through currency commercial banks.
Now the question arises that how much currency can be printed by the RBI at a time and how the RBI decides the quantity of currency notes production?
Meaning of Minimum Reserve System
Printing of currency notes in India is done on the basis of Minimum Reserve System (MRS). This system is applicable in India since 1956.
According to this system, the Reserve Bank of India has to maintain assets of at least 200 crore rupees all the times. Out of this 200 crore, the 115 cr rupee should in the form of Gold or gold bullion and rest 85 cr. should be in the form of foreign currencies.
After maintaining the Minimum reserve the RBI can print any number of currency notes as per the requirement of the economy. Although RBI has to take prior permission from the government.
Objectives of Minimum Reserve System (MRS)
There are many objectives of MRS but a few are;
1. To ensure the confidence of the Indian currency holders that the currency held by them is a legal tender and they will receive the value of the currency held by them.
2. The Minimum Reserve System is a token of confidence to the general public that the Indian government is liable to pay them as per the face value of the notes because the RBI governor promise to the public that “I promise to pay a the bearer a sum of 100/500 rupee.”
3. RBI wants to ensure the appropriate supply of currency in the economy through MRS.
4. Through the MRS the RBI accelerate the economic growth of the country without increasing the rate of inflation in the economy.
Due to its widespread benefits the Minimum Reserve System still continues in India. Sole purpose of the Minimum Reserve System is to maintain the money supply in the economy without increasing the inflation and maintain the confidence of the general public in the currency.