Annual Report


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Date : Aug 30, 2007
VII. Currency Management

VII.1 Ensuring adequate availability of good quality banknotes and coins is one of the core functions of the Reserve Bank. Towards this objective, the Reserve Bank continued to take measures during 2006-07 to meet the public's demand for banknotes and coins while simultaneously improving the quality of banknotes. The demand for banknotes was met almost in full. There was a marked improvement in the quality of Rs.10 denomination banknotes due to sustained effor ts. The mechanisation of note processing activities at currency chests was carried forward by equipping the currency chests with the sorting machines. The disposal capacity of soiled notes has been augmented by putting in place six Currency Verification and Processing Systems (CVPS) at a new sub-office in Lucknow. With this, the Reserve Bank now has a total of 54 CVPS and 28 Shredding and Briquetting Systems (SBS) at its 19 offices.

VII.2 In this backdrop, this Chapter details the currency management operations of the Reserve Bank during 2006-07. A multi-pronged approach was followed by the Reserve Bank  with the objective of meeting the public's demand for good quality banknotes and coins. The approach comprised regular supply of fresh notes, speedier disposal of soiled banknotes, improvements in inventory management and mechanisation of cash processing activity. Total supplies of banknotes, both in volume and value terms, from the printing presses were almost close to the indents. The growth in the volume of banknotes remained substantially lower than that in value terms, reflecting the ongoing compositional shift in favour of higher denomination banknotes. Star series banknotes were issued for the first time in 2006-07 with the objective of streamlining the procedures and reducing manpower deployed in the replacement activity at the printing presses. Operations aimed at computerisation and networking of the currency chests with the Reserve Bank's offices were pursued during 2006-07 to reap efficiency gains in reporting and accounting transactions.

BANKNOTES IN CIRCULATION

VII.3 During 2006-07, the value of banknotes in circulation rose by 17.5 per cent (16.8 per cent during 2005-06). The ratio of currency with the public to GDP has risen steadily over the years from 9.5 per cent of GDP at end-March 1990 to 11.6 per cent at end-March 2006 and further to 11.7 per cent at end-March 2007. The ratio of currency with the public to broad money (M3) declined from 15.1 per cent at end- March 2006 to 14.6 per cent at end-March 2007 continuing with its declining trajectory over the past few years (Chart VII.1).

VII.4 The volume of banknotes rose by 5.2 per cent during 2006-07 (2.3 per cent a year ago). The growth in the volume of banknotes, thus, continued to be substantially lower than that in value terms, mainly on account of the gradual compositional shift towards higher denomination banknotes, particularly Rs.1000 and Rs.500 denominations. While the volume of Rs.500 denomination notes increased by 23.6 per cent during 2006-07 (19.4 per cent a year ago), that of Rs.1000 denomination notes rose by 45.7 per cent (52.7 per cent a year ago). The volume of Rs.10 banknotes increased by 14 per cent due to sustained efforts to pump in more fresh banknotes into circulation to bring about an improvement in the quality of these banknotes. On the other hand, the volume of banknotes of denominations Rs.2 and Rs.5 declined during the year, while that of Rs.20, Rs.50 and Rs.100 remained at almost the same level as in 2005-06 (Table 7.1).


Table 7.1: Banknotes in Circulation

Denomination

Volume (Million pieces)

Value (Rupees crore)

 

End-March

End- March

End-March

End-March

End-March

End-March

 

2005

2006

2007

2005

2006

2007

1

2

3

4

5

6

7

Rs.2 & Rs.5

6,484

6,217

6,008

2,548

2,431

2,334

Rs.10

6,770

6,274

7,155

6,770

6,274

7,155

Rs.20

1,938

2,038

2,089

3,876

4,076

4,178

Rs.50

5,988

5,568

5,590

29,941

27,840

27,951

Rs.100

12,328

13,464

13,544

1,23,282

1,34,640

1,35,444

Rs.500

3,055

3,647

4,508

1,52,728

1,82,350

2,25,400

Rs.1000

421

643

937

42,082

64,300

93,676

Total

36,984

37,851

39,831

3,61,227

4,21,911

4,96,138


VII.5 In volume terms, Rs.100 denomination notes had the largest share (34 per cent of the total pieces in circulation) at end-March 2007. In terms of value, Rs.500 denomination notes had the largest share (over 45 per cent of the total value of banknotes in circulation) at end-March 2007 (Chart VII.2).

VII.6 In the year 2004-05, the Reserve Bank had to contend with the reverse flow of coins. The overall stock of coins with the Reserve Bank, as a result, increased considerably causing strain on storage and distribution of coins. The trend continued for almost two years. In view of the comfortable stock of coins at the currency chests/small coin depots and the Reserve Bank, the Reserve Bank did not place any indent for coins for 2005-06 and 2006-07. There was a reversal in this trend from October 2006 onwards as there was a sudden spurt in the demand for Rs.2 coins. In view of the reported melting of Rs.2 cupro-nickel coins due to rising metal prices, the Government of India, in consultation with the Reserve Bank, decided to mint all denomination coins in ferritic stainless steel (FSS). An indent of 700 million pieces was placed in December 2006 for Rs.2 FSS coins and these coins have already been issued. For the year  2007-08, the Reserve Bank placed an indent of 300 million pieces, subsequently raised to 500 million pieces for Re.1 coins, 1,500 million pieces for Rs.2 coins and 300 million pieces for Rs.5 coins. The total value of coins (including small coins in circulation) increased by 11.2 per cent during 2006-07 (2.3 per cent in 2005-06). In volume terms, the increase was 6.5 per cent in 2006-07 (1.4 per cent in 2005-06) (Table 7.2). The value of coins, relative to the value of the banknotes, remains fairly small and has declined in recent years (from 1.7 per cent at end-March 2006 to 1.6 per cent at end-March 2007).

Table 7.2: Coins in Circulation

Denomination

Volume (Million pieces)

Value (Rupees crore)

 

End-March

End- March

End-March

End-March

End-March

End-March

 

2005

2006

2007

2005

2006

2007

1

2

3

4

5

6

7

Small Coins

54,051

54,115

54,277

1,353

1,357

1,364

Re.1 coin

17,896

18,730

22,878

1,790

1,873

2,288

Rs.2 coin

6,449

6,684

7,441

1,290

1,337

1,488

Rs.5 coin

5,238

5,289

5,761

2,619

2,645

2,881

Total

83,631

84,818

90,357

7,052

7,212

8,021


Currency operations

VII.7 The Reserve Bank continued with its initiatives to provide the public with good quality banknotes.  Towards this objective, a multi-pronged approach is pursued involving regular supply of fresh notes, speedier disposal of soiled banknotes, improvement in inventory management and mechanisation of cash processing activity. In the recent period, the discontinuance of the practice of stapling banknotes has also contributed to improvement in quality of banknotes. Banks have been advised to issue only clean notes to the public and to remit the soiled notes in unstapled condition to the Reserve Bank through currency chests. Efforts are being made to increase the life of the banknotes and the Reserve Bank is examining various options in this regard.

Currency Chests

VII.8 The core central banking function of note issue and currency management is performed by the Reserve Bank through its 18 Issue Offices, the sub-office of the Issue Department at Lucknow, a currency chest at Kochi and a wide network of 4,301 currency chests and 4,027 small coin depots. The Reserve Bank has agency arrangements, mainly with scheduled commercial banks, under which a currency chest facility is granted to them. The currency chest branch is an extended arm of the Reserve Bank's Issue Department and carries out the same functions of issue of fresh banknotes/coins, retrieval of soiled banknotes, exchange of banknotes and coins including mutilated banknotes (Chart VII.3). The total number of currency chests declined further during 2006-07 reflecting the impact of the on-going policy to progressively convert and/or close currency chests held with the State Treasuries as well as rationalisation of currency chests mainly by State Bank of India (Table 7.3).

VII.9 Out of the 4,301 currency chests maintained by various banks, 4,027 chests have so far been equipped with note sorting machines. The progress made in respect of installation of note sorting machines in the remaining currency chests of the various banks is being closely monitored.

Table 7.3: Currency Chests

Category

Number of Currency Chests

 

June

June

June

 

30, 2005

30, 2006

30, 2007

1

2

3

4

 

 

 

 

Treasuries

149

116

26

State Bank of India

2,198

2,182

2,127

SBI Associate Banks

1,008

994

988

Nationalised Banks

983

1,028

1,061

Private Sector Banks

72

83

94

Co-operative Banks

1

1

1

Foreign Banks

4

4

4

Reserve Bank

20

20

20

Total

4,435

4,428

4,321



Table 7.4: Volume of Banknotes Indented and Supplied

(Million pieces)

 

2004-05

2005-06

2006-07

2007-08

Denomination

Indent

Supply

% of

Indent

Supply

% of

Indent

Supply

% of

Indent

 

 

Supply

to

 

 

Supply to

 

 

Supply to

 

 

 

 

Indent

 

 

Indent

 

 

Indent

 

1

2

3

4

5

6

7

8

9

10

11

Rs.5

160

179

112

50

50

Rs.10

4,700

4,332

92

3,300

1,183

36

3,500

3,480

99

4,200

Rs.20

1,000

755

76

1,200

706

59

500

438

88

600

Rs.50

2,040

1,862

91

2,700

1,063

39

1,400

1,458

104

1,200

Rs.100

5,030

3,956

79

5,550

3,208

58

4,000

4,034

101

4,200

Rs.500

1,625

1,252

77

1,800

661

37

1,500

1,473

98

1,800

Rs.1000

300

257

86

450

130

29

600

589

98

700

Total

14,855

12,593

85

15,000

7,001

47

11,500

11,472

99.8

12,700

Printing of Fresh Banknotes

VII.10 The supply of banknotes, both in volume and value terms, from the printing presses recovered during 2006-07 from the sharp decline in the preceding year. Total supplies in volume terms rose by 64 per cent during 2006-07 while those in value terms increased by almost 115 per cent during the year. Total supplies during 2006-07 were 99.8 per cent in terms of volume and 99.0 per cent in terms of value of the indent (Tables 7.4 and 7.5). The relatively lower supply of Rs.20 denomination banknotes vis-à-vis the indent was due to the reason that printing of these denominations with new/ additional security features commenced late during 2006-07.

VII.11 As part of its ongoing efforts to reduce the expenditure for printing of banknotes, the Reserve Bank continued with its efforts to source banknotes from the lowest cost producer (Box VII.1).

VII.12 The position of indent and supply of coins during 2004-05 to 2006-07 is set out in Table 7.6.

Disposal of Soiled Notes

VII.13 During 2006-07, 7,325 million pieces of soiled banknotes (18.3 per cent of banknotes in circulation) were disposed off. Notes of Rs.100 denomination constituted the largest share of soiled notes, followed by Rs.10 denomination notes (Table 7.7). As against a disposal of 7,325 million pieces during the year, 10,214 million pieces of fresh banknotes were supplied to members of public and to currency chests (9,485 million pieces supplied in 2005-06). The number of notes withdrawn from circulation and eventually disposed off in the Reserve Bank offices has, therefore,  decreased due to improvement in the quality of notes in circulation as part of the Reserve Bank's Clean Note Policy.

Table 7.5: Value of Banknotes Indented and Supplied

(Rupees crore)

 

2004-05

2005-06

2006-07

2007-08

Denomination

Indent

Supply

% of

Indent

Supply

% of

Indent

Supply

% of

Indent

 

 

 

Supply to

 

 

Supply to

 

 

Supply to

 

 

 

 

Indent

 

 

Indent

 

 

Indent

 

1

2

3

4

5

6

7

8

9

10

11

Rs.5

80

90

113

Rs.10

4,700

4,332

92

3,300

1,183

36

3,500

3,480

99

4,200

Rs.20

2,000

1,510

76

2,400

1,412

59

1,000

876

88

1,200

Rs.50

10,200

9,310

91

13,500

5,316

39

7,000

7,292

104

6,000

Rs.100

50,300

39,560

79

55,500

32,084

58

40,000

40,348

101

42,000

Rs.500

81,250

62,600

77

90,000

33,065

37

75,000

73,655

98

90,000

Rs.1000

30,000

25,700

86

45,000

12,960

29

60,000

58,910

98

70,000

Total

1,78,530

1,43,102

80

2,09,700

86,020

41

1,86,500

1,84,561

99

2,13,400

Box VII.1
Printing Cost of Banknotes

The Reserve Bank has been sourcing banknotes from the two presses of the Security Printing and Minting Corporation of India (SPMCIL), and the two presses of its wholly owned subsidiary, Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (BRBNMPL). The cost of printing banknotes during the year ended March 2007 was Rs.2,020.20 crore. Of this, Rs.1041.95 crore was paid to the SPMCIL presses in respect of 4,642 million banknotes supplied by them and Rs.978.25 crore to BRBNMPL for 6,830 million notes procured from its presses. It has been the Reserve Bank's endeavour to consistently bring down the cost of banknotes by encouraging the note presses to bring about greater efficiency in their operations while maintaining the quality of printed notes. The cost of banknotes paid to the SPMCIL and BRBNMPL presses in the last five years is set out in the Table.

Table: Supply and Cost of Banknotes

Year(April-March)

SPMCIL

BRBNMPL

 

 

Supply

Cost

Supply

Cost

 

(Million pieces)

(Rupees crore)

(Million pieces)

(Rupees crore)

2002-03

5,198

750.10

6,172

682.99

2003-04

5,065

894.23

8,101

815.33

2004-05

4,622

783.25

7,971

660.32

2005-06

2,694

405.90

4,307

628.96

2006-07

4,642

1,041.95

6,830

978.25

Mechanisation

VII.14 Mechanisation of cash processing activity and disposal of soiled banknotes has been one of the major thrust areas of the Reserve Bank in currency management.  With the opening of Lucknow sub-office in October 2006 and resultant capacity augmentation, the Reserve Bank has now in place 54 Currency Verification and Processing Systems (CVPS) and 28 Shredding and Briquetting Systems (SBS) at its 19 Offices. During 2006-07, 4,532 million pieces of banknotes were processed on these machines. The remaining notes were disposed off under other modes including manual system.

Counterfeit Banknotes

VII.15 During 2006-07, the number of counterfeit banknotes detected at the Reserve Bank offices and bank branches declined by 15.5 per cent. However, in value terms, the counterfeit banknotes increased by 31.2 per cent on account of rise in detections in the banknotes of higher denominations, viz., Rs.1000 and Rs.500 banknotes (Table 7.8). All banks have been advised to install note sorting machines at their currency chest branches to facilitate careful

Table 7.6 : Indent and Supply of Coins

(Million pieces)

 

2004-05

2005-06

2006-07

Denomination

Indent

Supply

Indent

Supply

Indent

Supply

1

2

3

4

5

6

7

25 paise

0

0

0

0

0

0

50 paise

0

0

0

0

0

0

Re. 1

1,250

463

0

12.7

0

45 *

Rs.2

500

232

0

21.5

700

686

Rs.5

750

201

0

7.2

0

11

Total

2,500

896

0

41.4

700

742

* : Includes mainly commemorative coins.



Table 7.7: Denomination-wise Disposal of

Soiled Notes

Denomination

Volume in million pieces

 

2004-05

2005-06

2006-07

1

2

3

4

Rs.1000

5

5

7

Rs.500

257

242

276

Rs.100

4,324

3,250

2,360

Rs.50

2,490

2,160

1,456

Rs.20

485

532

489

Rs.10

3,716

2,593

2,243

Up to Rs.5

475

522

494

Total

11,752

9,304

7,325

Memo:

 

 

 

Total Banknotes in Circulation

36,984

37,851

39,831


examination and detection of counterfeit banknotes at the currency chest level as also to ensure efficient sorting of banknotes.

New/Additional Security Features of Banknotes

VII.16 In order to maintain the confidence of the public in the banknotes, the Reserve Bank, in consultation with the Government of India, reviews the security features of banknotes periodically. As a part of this process, the Reserve Bank had started from 2005-06, the introduction of banknotes with several new/additional security features in denominations of Rs.10, Rs.50, Rs.100, Rs.500 and Rs.1000. These include (a) demetallised, magnetic and machine readable windowed security thread with a colour shift from green to blue in Rs.100, Rs.500 and Rs.1000 denominations; (b) improved intaglio printing; (c) improved see-through feature incorporating the denominational numeral instead of the floral design; and (d) electrotype watermark featuring the denominational numeral alongside Mahatma Gandhi portrait in the watermark window. The process of issuance of all the denominations of the banknotes in the Mahatma Gandhi Series 2005 with additional/new security features was completed during 2006-07 with the issuance of Rs.20 denomination banknotes with additional/new security features in August 2006. Posters containing the pictorial details of additional/new security features on banknotes have been provided to all the banks for public dissemination. The Regional Offices of the Reserve Bank have been advised to facilitate public awareness of these security features at the local levels through organisations such as the railways and police authorities as well as through posters printed in vernacular. The details regarding the security features of the new banknotes have been posted on the Reserve Bank's website.

Introduction of Star Series Banknotes

VII.17 The Reserve Bank commenced the issuance of Star series banknotes in the denomination of Rs.10, Rs.20 and Rs.50 during 2006-07. The Star series banknotes look exactly like the earlier banknotes in the Mahatma Gandhi series but have an additional character, viz., * (Star) in the number panel between the prefix and the serial number. The packets with Star series notes contain, as usual, 100 pieces, though not in serial order. The Star series system helps in streamlining the procedures at the printing presses and reducing manpower deployed in replacement activity. The bands of the fresh note packets containing the Star series numbered note/s clearly indicate the presence of such banknotes in the packets.

Table 7.8: Counterfeit Banknotes Detected

 

Number of pieces

Value (Rupees)

Denomination

2004-05

2005-06

2006-07

2004-05

2005-06

2006-07

1

2

3

4

5

6

7

Rs.10

79

80

110

790

800

1,100

Rs.20

156

340

305

3,120

6,800

6,100

Rs.50

4,737

5,991

6,800

2,36,850

2,99,550

3,40,000

Rs.100

1,61,797

1,04,590

68,741

1,61,79,700

1,04,59,000

68,74,100

Rs.500

14,400

12,014

25,636

72,00,000

60,07,000

1,28,18,000

Rs.1000

759

902

3,151

7,59,000

9,02,000

31,51,000

Total

1,81,928

1,23,917

1,04,743

2,43,79,460

1,76,75,150

2,31,90,300

Note: Data are exclusive of the counterfeit notes seized by police and other enforcement agencies.

Computerisation of Currency Management

VII.18 The Reserve Bank has taken up the task of putting in place an Integrated Computerised Currency Operations and Management System (ICCOMS) in the Issue Departments in regional offices and in the central office. The project also includes computerisation and networking of the currency chests with the Reserve Bank's offices to facilitate prompt, efficient and error-free reporting and accounting of the currency chest transactions and seamless flow of information between Issue Departments and the Central Office in a secure manner with proactive monitoring. All offices of the Reserve Bank commenced 'live-run' on the Currency Chest Reporting System (CCRS) and the Chest Accounting Module (CAM) of ICCOMS-ID component. Once these two components are completed, the Currency Management Information System (CMIS) Module at the Department of Currency Management (DCM) at the Central Office of the Reserve Bank will be taken up for implementation, the testing for which has already begun.

Customer Service

VII.19 As a part of its efforts to improve  customer service in matters relating to issue/acceptance of coins from public and exchange of soiled and mutilated banknotes, the Reserve Bank reiterated its directions to all scheduled commercial banks to issue/ accept coins and soiled banknotes in transactions or for exchange without any restriction. Offices where demand for coins has picked up were advised to arrange for coin camps at identified locations in consultation with banks. Efforts were continued to provide timely and efficient customer service not only at the Reserve Bank offices but also at the bank branches.

ISO 9001:2000 Certification

VII.20 Apart from DCM, the two Issue offices at Kolkata and Hyderabad were ISO (9001:2000) Certified in May 2006. Four more Issue offices, viz., New Delhi, Jaipur, Chennai and Bangalore have been taken up for ISO Certification.

Bharatiya Reserve Bank Note Mudran Pvt. Ltd.

VII.21 The Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (BRBNMPL), incorporated as a wholly owned subsidiary of the Reserve Bank, was set up in 1996 to take over the work of the New Note Press project. The BRBNMPL prints Bank Note Forms at its two note presses at Mysore (Karnataka) and Salboni (West Bengal). The total supply of banknotes by  BRBNMPL during 2006-07 was 6,830 million pieces.

Outlook

VII.22 The Reserve Bank would continue to conduct its currency management operations with a view to ensuring efficient customer service through an adequate supply of good quality banknotes and coins in the country. The Reserve Bank will continue with its efforts to explore various options for increasing the circulation life of banknotes. Rationalisation of systems and procedures with a view to increasing the efficiency of operations and to strive towards setting international benchmarks in currency management would also be pursued.


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