India at present follows the Paper Currency Standard because here standard currency is made of paper. This is also referred to as Managed Currency Standard as any amount of notes can be issued with the minimum backup of gold worth र 115 crores. Remember, a monetary system refers to the form of standard money used in the economy. It is legal money through which government discharges its obligations. The standard money which is used in India is made of paper. In India the monetary authority is Reserve Bank of India (RBI) which has adopted a standard currency made of paper. That is why India is said to be on a paper currency standard. Following points need to be noted in this regard.
(i) Paper currency is the main currency of the country. It is unlimited legal tender which means that it can be used to settle debts and make payments up to an unlimited amount. Coins made of cheap and light metals are used for making smaller payments. Again these coins are limited legal tender because they can be used for making payments and setting debts only up till a limited amount. For instance, it would be inconvenient to settle a debt of र 2,000 with 50 paise and 25 paise coins.
(ii) RBI has the sole monopoly to issue currency notes in India from र 2 and above. The central government (Ministry of Finance) issues the one-rupee note and all coins but the responsibility for putting them into circulation rests with the RBI.
(iii) The system which governs note issue in India is the Minimum Reserve system according to which the Central Bank keeps a minimum reserve of gold and foreign exchange and on this basis can issue notes to any limit. Since paper currency is not convertible into precious metal gold which is backing it, therefore, the currency is said to be inconvertible.