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RBI Debases Our Currency By 15% p.a. Since 2001

Can also read: Why Gold is Such a Good Investment?

And: RBI, A Substantial Contributor To Inflation?

Consider the alternate explanation to inflation: It’s the RBI’s fault. If you have more money chasing the same goods, you get inflation. The Reserve Bank of India controls how much of our currency is printed, and this along with bank reserves* forms the monetary base of India. This is called “Reserve Money”. 

(* Remember the Cash Reserve Ratio (CRR)? That’s what banks keep with the RBI)

How much has reserve money grown? Since 2001, we have grown our reserve money an average of 15.4%. (as of Jun 22, 2012).


The graph plots an annualized growth since 2001 (which means the 2006 data point means how much has reserve money grown in the five years since 2001, annualized).

The graph remains steadily above 10%.

Current reserves are 14.68 trillion (lakh crore)+. This is split into:

Currency: 11.29 trillion
Bank Reserves: 3.38 trillion
There are tiny “other” pieces that add up.

Most of our reserve money comes from currency printed.

Some debasement could be good. You might argue that the RBI has to debase to make room for productivity improvements to keep prices even. Essentially it means there are more goods today than yesterday, so you increase the reserve money by the same percentage. (I don’t particularly like that argument since it has been proved wrong in, say, technology, where productivity benefits have reduced prices consistently and things haven’t been bad) Even by that argument, the 15%+ growth is unexplainable; our productivity growth has been, by my estimates, a max of 5-6% a year. Subtract that, and voila, you get the 10% inflation we are seeing today.

Reserve Money growth affects inflation with a lag, when the economy responds with growth. The US fed (and Japan) can get away with their debasements because there is no growth; when that happens, they will have to find ways to slow the money supply growth.

A side effect of cutting down reserve money growth is that banks get no money, and call rates will zoom up (as they did, upto 100% in the 90s). This could take a few banks out of business, or at least hurt the banking system.

The root cause of the massive debasement has been RBI’s consistent buying of dollars and printing rupees to pay for them. This has happened in much of the 00’s. Only recently – the last year or so – you find the RBI selling dollars instead of buying, and lo and behold, the reserve money growth has slowed. (But it has picked up in the last few months)


The next thing to wonder is what is happening to the broad money supply. When reserve money comes into the system, the banks run their magic on it and “multiply” it to a higher amount. This is the concept of Fractional Reserve Banking.  Broad Money Supply (M3) is now at Rs. 76 trillion (lakh cr.) and counting. This has grown substantially, at over 15% a year recently and 26% annualized since 2006! (It was just Rs. 52 trillion in 2009 and 26 trillion in 2006)

But the recent rate cuts and CRR cuts have resulted in an increase in both M3 growth and base money growth. (To avoid double counting, the graph below uses only the “currency printed” part of reserve money)


Unless we can temper growth in M3 and reserve money, we will see inflation come back. This will happen even if the government gets its act together. More debasement will happen naturally as black money gets “converted” to white, or as rural people get access to banks and put their money there instead (bank deposits will increase, and thus reserves will increase).

You see why Gold is good? When your currency is getting debased every year, why would you not want to hold something else as a store of value? To those gurus telling us to stop buying gold to help the country, kindly tell the RBI to stop debasing our currency first. 

  • Kaushik says:

    Very prompt and to the point. I love it Deepak!

  • Ramanand says:

    Absolutely correct assessment Deepak. I would argue that RBI has no business keeping a dollar reserve running into billions of dollars. If Govt. of India needs it, then let it hold it under the treasury’s balance sheet (unless these two are the same, which I believe they’re not).
    Ultimately, to keep inflation in check, government spending needs to be curtailed. Right now, when govt. runs deficits, it basically gets the money from RBI (against govt bonds) with no limit on them whatsoever.
    Its then upto RBI whether to sell those govt bonds (not that inflationary) or buy them back (highly inflationary).
    What is needed is a new rule like: RBI’s govt lending should not increase by more than the growth in GDP (in absolute numbers). So if we have a growth of 5.5% in GDP which translates to Rs. 50,000 Cr., then for next year, RBI must not be allowed to lend more than that amount to Govt. of India. But then this would upset the applecart that is run by our netas and govt servants!

  • Karl says:

    Deepak, why should the RBI print any money at all? If the supply of money is constant, will that not lead to a fall in prices as the amount of goods that the economy produces increases. Why are prices not allowed to fall which would lead to an increase in real wealth where a rupee is able to purchase more quantity of goods than before?

    • Good Q. The answer is that people don’t like to see wages fall, but they are ok with falling prices. That necessarily means higher labour productivity, which leads to a contraction in jobs. Effectively, like prices wages will fall. Plus, you have to accomodate for new businesses and new people. This is the reason why they had linked the world economy with gold (the gold standard) which meant that to add new currency you needed to add more gold, and you couldn’t respond to an issue of low employment monetarily. Of course, it’s possible in theory, but what would end up happening is a political challenge due to the economic consequences.

      • Karl says:

        Thanks for the reply Deepak. You made an interesting point that wages tend to be sticky and people don’t like to see falling wages. However this constant increase in prices poses serious difficulties particularly during retirement period. The savings that people generate during their employment tenure for retirement is constantly under unfair attack by the newly printed money which leads to currency debasement.
        On your point regarding new businesses, the fact is accomodating new businesses and new people will increase the supply of goods even more leading to a further fall in prices. Due to technology improvement that is an ongoing process the output production will increase at a rate greater than labour supply. This will lead to a higher standard of living during your employment tenure as well as during retirement. The only loser under such a scenario will be the government because under a falling nominal prices environment they lose their ability to tax gains that was available under a scenario of inflating money supply and hence rising prices.
        The following article explains my point in greater detail –

  • Santosh says:

    Hi Deepak,
    I have read somewhere that even the US is printing dollars to pay for various things as they are also running on a huge deficit. Then why does the same theory apply to them? or am I missing something?

  • Ravi Shankar says:

    Though I agree with you that RBI is the final arbiter of the value of the currency, they do not work in isolation. The government of the day is as much a culprit, running huge deficits financed by RBI. I would like to highlight one aspect though, the currency of a country (M1) monetary base is usually less than 5% of the money in circulation. 95% of circulation is through Bank credit creation. The youtube video Money as debt is wonderfully informative source for explaining the global modern money system.

  • Chethan says:

    Is Indian Currency on Gold standard ?
    If yes, what percentage ?
    If No, is it backed by anything else or just fiat money ?