Note Issue and Currency Management by the Reserve Bank of India

The power to issue currency is the oldest function of a central bank and the one for which the Reserve Bank was first created. Its preamble speaks of regulating the issue of bank notes before it speaks of anything else. The law on note issue decides who may print money, what gives a note its value in law, what backing the Bank must hold against the notes it has issued, and on what terms the State may withdraw legal tender status from currency already in people's hands. That last question was settled by the Supreme Court in 2023.

How currency is issued and backed in India

Figure 1: How currency is issued and backed in India

1. The Sole Right of Issue

Section 22, Reserve Bank of India Act, 1934

(1) The Bank shall have the sole right to issue bank notes in India, and may, for a period which shall be fixed by the Central Government on the recommendation of the Central Board, issue currency notes of the Government of India supplied to it by the Central Government, and the provisions of this Act applicable to bank notes shall, unless a contrary intention appears, apply to all currency notes of the Government of India issued either by the Central Government or by the Bank in like manner as if such currency notes were bank notes.

(2) On and from the date on which this Chapter comes into force the Central Government shall not issue any currency notes.

A monopoly in law: the right is sole and exclusive. No other person, and not even the Central Government once the Chapter is in force, may issue bank notes.
The one rupee exception: the one rupee note and all coins are issued by the Central Government under the Coinage Act, 2011, although they are put into circulation only through the Reserve Bank.
A connected monopoly (Section 31): no person in India other than the Bank or, as expressly authorised by the Act, the Central Government, may draw, accept, make or issue any bill of exchange, hundi or promissory note payable to bearer on demand. This prevents the creation of privately issued currency substitutes.

2. The Issue Department

Separation (Section 23): the issue of notes is conducted by an Issue Department which is wholly separated from the Banking Department, with its own assets and liabilities.
Why separate: the separation makes the backing of the currency visible and prevents note issue from being used to finance the Bank's ordinary banking business.
Liabilities (Section 34): the liabilities of the Issue Department are the total amount of bank notes for the time being in circulation.
Assets (Section 33): the assets of the Issue Department must be not less than the total of its liabilities, and must consist of gold coin, gold bullion, foreign securities, rupee coin and rupee securities, along with bills of exchange and promissory notes payable in India and eligible for purchase by the Bank.

The minimum reserve system

Until 1956 the Bank worked on a proportional reserve system, under which gold and sterling securities had to be at least forty per cent of the total assets of the Issue Department. The Reserve Bank of India (Amendment) Act, 1956 replaced it with the minimum reserve system that applies today. Under Section 33(2), in the form substituted with effect from 31 October 1957, the Bank must hold gold coin, gold bullion and foreign securities of an aggregate value of not less than ₹200 crore, of which the value of gold coin and bullion must be not less than ₹115 crore. Beyond that fixed minimum, notes may be issued against rupee securities, which means that the volume of note issue is in practice limited by monetary policy rather than by the stock of gold.

⚠ Note

The minimum reserve figures of ₹200 crore and ₹115 crore have not been revised since 1957 and are now trivially small against the currency in circulation. They are of historical and examination importance rather than of any present economic significance. The real discipline on note issue comes from the inflation target in Chapter IIIF and from the Bank's balance sheet management, not from Section 33.

3. Denominations and Form

Denominations (Section 24): bank notes are of the denominational values of two, five, ten, twenty, fifty, one hundred, five hundred, one thousand, five thousand and ten thousand rupees, or of such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify by notification. The ₹200 and ₹2000 notes were introduced in this way.
Discontinuance: the Central Government may, on the Board's recommendation, direct the non-issue or discontinuance of issue of bank notes of any denominational value.
Form and material (Section 25): the design, form and material of bank notes are approved by the Central Government after consideration of the recommendations of the Central Board. The Government therefore controls what the note looks like, while the Bank controls how many are issued.
Printing: notes are printed at presses of the Security Printing and Minting Corporation of India and of the Bank's own subsidiary, Bharatiya Reserve Bank Note Mudran Private Limited.

4. Legal Tender

Section 26(1), Reserve Bank of India Act, 1934

Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.

Meaning: a tender of legal tender in the amount due is a good discharge of a money debt, and a creditor who refuses it cannot complain of non-payment.
Guarantee: the note is guaranteed by the Central Government, not merely by the Bank. This is why the Governor's promise on the face of the note has substance.
Coins: under the Coinage Act, 2011, a coin of a denomination not below one rupee is legal tender for any sum not exceeding one thousand rupees, and a fifty paise coin for any sum not exceeding ten rupees. Legal tender in coin is therefore limited in amount, while legal tender in notes is unlimited.
Soiled and mutilated notes (Sections 27 and 28): the Bank shall not re-issue notes that are torn, defaced or excessively soiled, and no person is of right entitled to recover from the Government or the Bank the value of a lost, stolen, mutilated or imperfect note. The Bank may nonetheless refund value as of grace, and does so under the Note Refund Rules.

5. Demonetisation

Section 26(2), Reserve Bank of India Act, 1934

On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, 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.

The conditions for a valid exercise of Section 26(2)

Figure 2: The conditions for a valid exercise of Section 26(2)

1946: high denomination notes were demonetised by ordinance, and Section 26A of the RBI Act records that notes of ₹500, ₹1,000 and ₹10,000 issued before 13 January 1946 are not legal tender.
1978: the High Denomination Bank Notes (Demonetisation) Act, 1978 withdrew notes of ₹1,000, ₹5,000 and ₹10,000 by a separate Act of Parliament.
2016: notes of ₹500 and ₹1,000 ceased to be legal tender by notification under Section 26(2) dated 8 November 2016, with an exchange window that ran to 30 December 2016.
2023: the ₹2000 note was withdrawn from circulation in May 2023. This was not a demonetisation. The note remains legal tender, and by early 2026 about 98 per cent of the notes in circulation had returned, with exchange and deposit continuing at the Bank's Issue Offices.

📖 Vivek Narayan Sharma v. Union of India, (2023) 3 SCC 1

Facts: The notification of 8 November 2016 under Section 26(2) declared that all bank notes of ₹500 and ₹1,000 would cease to be legal tender. It was challenged on the grounds that Section 26(2) permits the withdrawal of only a particular series and not of all notes of a denomination, that the Bank had not independently recommended the measure, that the provision amounted to excessive delegation, and that the measure was disproportionate.

Held: A Constitution Bench of five judges, by four to one on 2 January 2023, upheld the notification. The majority, speaking through Gavai J., held that the word "any" in "any series of bank notes" must be read purposively to include all series, that the requirement of a recommendation of the Central Board is a sufficient safeguard against excessive delegation, that the consultation between the Government and the Bank over some six months satisfied that requirement, and that the measure satisfied the four-pronged proportionality test, having a legitimate aim in curbing black money, counterfeit currency and terror financing, a rational nexus with that aim, and a reasonable fifty two day window for exchange.

Ratio: Section 26(2) is wide enough to support the demonetisation of all notes of a denomination, provided the recommendation of the Central Board precedes the notification and the measure survives proportionality. Nagarathna J., dissenting, would have read the provision down to a particular series and held that demonetising all notes of a denomination requires legislation by Parliament, and that the Bank had not applied an independent mind since the proposal came from the Central Government and the Board acted within twenty four hours.

6. Currency Management in Practice

Issue Offices: the Bank maintains nineteen Issue Offices from which notes enter and leave circulation.
Currency chests: stocks of notes and coins are held by selected bank branches as currency chests on behalf of the Reserve Bank, which is how currency reaches the public across the country.
Obligation to supply (Section 39): the Bank must issue rupee coin on demand in exchange for bank notes and must supply currency in such denominations as it thinks necessary for the requirements of the public.
Clean note policy: soiled and mutilated notes are withdrawn and destroyed, and banks are required to sort notes into issuable and non-issuable categories.
Central bank digital currency: the Finance Act, 2022 amended the definition of a bank note in Section 2(aiv) to include currency in digital form issued by the Bank, which is the statutory foundation of the digital rupee.

⚠ Key point

Section 22 gives the Bank the sole right to issue bank notes; the one rupee note and coins come from the Central Government under the Coinage Act, 2011 but circulate only through the Bank. Section 23 separates the Issue Department, whose liabilities are the notes in circulation (Section 34) and whose assets (Section 33) must include gold and foreign securities of at least ₹200 crore, with gold of at least ₹115 crore, the minimum reserve system adopted in 1956 with the present figures fixed in 1957. Section 24 fixes denominations up to ₹10,000, Section 25 gives the Central Government control over design and form, and Section 26(1) makes every note legal tender guaranteed by the Central Government. Section 26(2) permits demonetisation by notification on the recommendation of the Central Board, upheld in Vivek Narayan Sharma v. Union of India, (2023) 3 SCC 1 by four to one, with Nagarathna J. dissenting.

7. Quick Revision

✦ Points worth fixing

Sole right in Section 22, separate department in Section 23, denominations in Section 24, form in Section 25, legal tender in Section 26. The sections run in the order of the story.

Two hundred and one fifteen: the minimum reserve in crore, total and gold, unchanged since 1957.

One rupee from the Government, everything above from the Bank.

Ten thousand is the statutory ceiling on a denomination.

One thousand for coins of a rupee and above, ten rupees for fifty paise. Coin legal tender is capped; note legal tender is not.

Any means all. That one phrase is the majority in Vivek Narayan Sharma.

1946 ordinance, 1978 Act, 2016 notification. Three demonetisations, three different instruments.

Withdrawal is not demonetisation. The ₹2000 note is still legal tender.

8. Frequently Asked Questions

Who has the right to issue currency in India?

The Reserve Bank of India has the sole right to issue bank notes under Section 22 of the RBI Act, 1934. The one rupee note and all coins are issued by the Central Government under the Coinage Act, 2011, but they are put into circulation only through the Reserve Bank.

What is the minimum reserve system?

The system under Section 33 by which the Bank must hold gold coin, gold bullion and foreign securities worth at least ₹200 crore, of which gold must be at least ₹115 crore, as backing for the note issue. Beyond that fixed minimum, notes may be issued against rupee securities. It replaced the proportional reserve system in 1956, and the present figures date from 1957.

What does it mean to say a note is legal tender?

That a tender of the note in the amount due discharges a money debt, so a creditor cannot refuse it and then allege non-payment. Under Section 26(1) every bank note is legal tender at any place in India for the amount expressed in it, and is guaranteed by the Central Government.

Did the Supreme Court hold the 2016 demonetisation valid?

Yes. In Vivek Narayan Sharma v. Union of India, (2023) 3 SCC 1 a Constitution Bench upheld it by four to one, holding that "any series" in Section 26(2) includes all series, that the recommendation of the Central Board is an adequate safeguard against excessive delegation, and that the measure satisfied proportionality. Nagarathna J. dissented.

Is the ₹2000 note still valid?

Yes. The ₹2000 note was withdrawn from circulation in May 2023 but was not demonetised, and it continues to be legal tender. Bank branches stopped exchanging it in October 2023, but it may still be exchanged or deposited at the Reserve Bank's Issue Offices, or sent to them by post.

Can a torn or soiled note be exchanged as a matter of right?

No. Section 28 provides that no person is of right entitled to recover the value of a lost, stolen, mutilated or imperfect note. The Bank may nonetheless refund value as of grace, and in practice does so under the Note Refund Rules, which prescribe how much is payable according to the area of the note that survives.

9. Related Topics and Provisions

Establishment and management of the Reserve Bank
The Reserve Bank as banker to the Government and to banks
Monetary policy and the Monetary Policy Committee
Instruments of monetary control
Payment systems and the digital rupee