Value of currency note has not increased with inflation: RBI

Value of currency note has not increased with inflation: RBI

February 21st, 2013

As per a RBI study, the average value of a currency note did not keep pace with inflation in the past four decades.
As per the study:

• There has been only eight fold increase in the average value of a currency note (for denominations of Rs 10 and above) while there was a 18-fold rise in the inflation.
• The evolving denominational distribution of currency notes, even with the introduction of higher denomination notes (Rs 500 and Rs 1,000) was not commensurate with the underlying demand for the various denominations necessitated by the inflation path.
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• Implication: A consumer would need to carry a much larger number of currency notes than was the case earlier to purchase the same volume of goods and services.
• Due to inflation, there has been a decline in the average real value of a currency note of Rs 10 and above (Base: 1971-72) from Rs 21.6 in 1971-72 to Rs 5.8 in 1997-98 before a modest rise to Rs 8.9 in 2008-09.

Possible factors behind such trends in the denominational pattern of currency circulation:

• Presence of only two government note printing units at Nashik and Dewas till the setting up of two more note presses in Mysore and Salboni in 1995-96.
• Use of alternative payment channels such as cheques, credit/debit cards and internet banking which are not only more efficient instruments than paper currency but also leave paper/electronic trails facilitating tax audit.
• The possibility of use of high denomination notes for black economy transactions and the demonetisation of Rs 1,000 and higher denomination notes in 1978 to curb hoarding/circulation of black money.