Under which currency issue system does the Reserve Bank of India (RBI) currently issue currency notes?

Introduction / Context:
Central banks around the world follow specific reserve systems when issuing currency notes. These systems determine how much gold, foreign exchange or other reserves must be maintained against the notes in circulation. In India, the Reserve Bank of India (RBI) follows a particular system that guides its note issue policy. Understanding the name and basic idea of this system is important for banking, economics and competitive exam questions.

Given Data / Assumptions:

• The question is about the system used by the Reserve Bank of India for issuing currency notes.
• Differently named systems such as Maximum Fiduciary, Proportional Reserve, Fixed Fiduciary and Fixed Minimum Reserve exist in monetary history.
• Each system specifies how reserves relate to the volume of currency issued.
• The current method used by RBI is being tested in this question.

Concept / Approach:
Under a Fixed Minimum Reserve System, the central bank is required to maintain a minimum amount of reserves in specified forms (for example, gold and foreign securities), irrespective of the total amount of notes issued. Beyond that minimum, there is no strict proportional requirement between reserves and currency in circulation. This system offers flexibility in expanding money supply while still maintaining a basic level of backing and confidence. Historically, India shifted from a proportional reserve system to a fixed minimum reserve system to better support economic growth while still maintaining monetary stability.

Step-by-Step Solution:
Step 1: Recall the different note issue systems: proportional reserve system, fiduciary system and fixed minimum reserve system. Step 2: Understand that under the proportional reserve system, a fixed proportion of the value of currency issued must be backed by reserves, which is not the current RBI framework. Step 3: Recognise that the fixed minimum reserve system requires the RBI to hold a minimum specified amount of gold and foreign securities as backing for currency notes. Step 4: Note that once this minimum reserve requirement is satisfied, the RBI can issue currency beyond that amount as needed, without maintaining a strict proportion for every additional note issued. Step 5: Match this understanding with the options and identify the Fixed Minimum Reserve System as the correct answer.

Verification / Alternative check:
In the fixed minimum reserve system, for example, the RBI might be mandated to keep a certain minimum value of gold and foreign securities, say Rs X crore, at all times. As long as this minimum is maintained, it can expand note issue to accommodate growing economic activity. This contrasts with a proportional reserve system, where every increase in currency requires a fixed percentage of reserves. The flexibility of the fixed minimum reserve system is considered better suited to a developing and expanding economy like India. This confirms that the RBI follows the fixed minimum reserve approach.

Why Other Options Are Wrong:
Option A, maximum fiduciary system, is not the name of the current RBI note issue framework and is more theoretical. Option B, proportional reserve system, was an earlier approach but is not the present system in India. Option C, fixed fiduciary system, usually refers to a limit on uncovered note issue, which again does not fully describe current RBI practice. Option E, gold coin standard system, is a historical system of currency convertibility and not applicable to modern RBI note issue. Only option D correctly names the fixed minimum reserve system used by the RBI.

Common Pitfalls:
Examinees sometimes confuse the proportional reserve system with the fixed minimum reserve system because both involve reserves and central bank backing. Another common error is assuming that the RBI still uses a strict gold or proportional standard, which is not true in the current flexible monetary environment. In competitive exams, remember that the present RBI note issue method is the fixed minimum reserve system, which combines a basic reserve requirement with flexibility in money supply expansion.

Final Answer:
The Reserve Bank of India issues currency notes under the Fixed Minimum Reserve System.