Minting, printing and counterfeiting

Jan 26 2014, 22:38 IST
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SummaryAlthough coins are physically durable, they fail to withstand inflation

Last week RBI announced it will be removing all pre-2005 notes from circulation fairly soon. That prompted me to dig out the speech I gave at an RBI Annual Retreat in early last September in Agra. What follows is relevant excerpts of that speech, with slight modifications.

At the outset, let us recognise that there is not one rupee crisis at present but actually two. Reflecting the excessively outward orientation of both India Inc and the financial media, the focus has been on the recent, sharp decline in the external value of the rupee.

Unfortunately, the far bigger crisis pertains to the rupees internal value, the decline in its domestic purchasing power. More specifically, there are insidious problems in the payments system, manifest not just in the flight to gold, but in the disappearance of coins, and the counterfeiting of notes. To coin an acronym, I will call this the MPC issue. To most of you this acronym would bring to mind the Monetary Policy Committee. I shall instead use it to refer to something else, generally ignoredminting, printing and counterfeiting. MPC entails huge costs that are seldom analysed.

Last year, a newspaper reported that fed up by the constant shortage and increased black marketing of coins, wholesale traders in Mumbai have minted their own coins and are using them as currency. So far, 50,000 coins of R1 and R2 have been minted and are being distributed in the wholesale markets of Bhendi Bazaar and Masjid Bunder For one rupee coins worth R100, one has to pay R114, and for two rupee coins worth R100, one has to pay R115

Before getting to the analysis of this matter, let us look at some basic trends in coin and note issuance (see table). What do the data show? First, there is a growing shift from coins (which was about 4% of currency in 1970) to notes. Second, the bulk of notes in circulation now are large notes.

Lower denomination currency generally tends to change hands more frequently than higher denomination currency. These lower denominations tend to be coins and not notes. This is because notes tear easily while coins last. From the central banks point of view, the cost of printing a given note is less than that of minting a given coin. Nevertheless, overall notes are more expensive to issue than coins since they have to be replaced. (This is the case even when

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