Why RBI can't print unlimited money?
A friend of mine once narrated story of his girl child regarding her understanding of money and world. My friend is a defense personnel he used to visit home during leave with three to four months of interval. the poor little girl was obsessed with the long absence of her father, asked " papa, you dont need to go to work this time". Papa with compassion and grief replied" if i dont go for work how will i earn money, how will i feed you and look after family". Little girl didnt understand the concern of her father with divine simplicity she told " plenty of money is available in ATM, you just need to dip the card inside machine, money will eventually come out".
The child's imagination astnoished me. The world would have been a better place if her words become true, but the system doesn't work same way the girl thought like we cannot alleviate poverty with printing more money.
The management of money and printing of currency notes in INDIA done by RBI. It was formed by a legislative act RBI Act 1934. Section 22 of this act exclusively deals with issuing of currency notes in India. RBI with the advice of government of India manages the currency. Basically the govt has the final say on a majority of rbi's actions. RBI has the sole right to print upto 10000 denominations and all currency notes are legal tender as guaranteed by RBI.
SYSTEM OF NOTE ISSUE
The issue department of RBI which deals with public directly given the responsibility of issuing currency, is required to maintain eligible assets of equivalent value. assets include -
GOLD, FOREIGN SECURITITES, RUPEE COINS, GOI RUPEE SECURITIES, BILLS OF EXCHANGE, PROMISORY NOTES PAYABLE IN INDIA.
PRINCIPLE OF NOTE ISSUE
At the time of establishment of RBI, GOLD standard was prevailing at the international level. In 1956 2nd five years plan proportional reserve system was replaced by minimum reserve system. This implies that note issuing authority is under obligation to maintain a certain amount of GOLD and Foreign exchange reserve.
Presently the minimum gold reserve backing the note issue in India has to be not less than 515 crores.
FACTORS
- Volume of Transactions.
- Nature of trade.
- Mode of payment.
- The price level.
- Banking Habits.
- Distribution of Incomes.
- Volume of demand deposit.
- Taxation policy.
- Public loans.
- Deficit Financing.
DEFICIT FINANCING and HEAVY MONEY PRINTING
When economic policy makers, government spent more than income known as deficit financing. like printing more money and supply it to market to tackle ongoing economic crisis. primarily it seems healthy but gradually inflation rise known as HYPERINFLATION. normal inflation is healthy for an economy, but if govt pump more and more money to economy creates high inflation. value of money decreases, foreign investors lose faith in local currency.
As economy is driven by supply and demand, printing more money creates bubble as supply remain constant. Price of day-to-day commodities increase sharply. hunger instability failure of macroeconomic activities more common in this type of financing.
example: Venezuela printed more money to tackle its economic crisis later it fell prey to the high inflation upto 200000 %. IMF estimated inflation would reach 10000000% by the end of 2019.
In 2007 Zimbabwe inflation rose upto 7.96*10^10% due to printing of excess amount of money.
So, though printing money is a viable option still govt try to avoid it in order to maintain economic stability sustainability.
