Introducing a new currency denomination and design is an exercise that any central bank does, keeping in consideration various factors like inflation, GDP growth, replacement of soiled banknotes, reserve stock requirements and the need for combating counterfeiting and above all the ease of transactions for the common man.
The optimal system of denominations of currency (coins and notes) is one that would minimize the number of denominations and concurrently increase the probability of proffering exact change.
So, what should be the optimal mix of currency denominations in India?
Some research papers have argued that optimal denominations should proceed in powers of three, if the ease of providing exact change needs to be maximized. However, no central bank has actually implemented these recommendations since powers of three are not compatible with the decimal system of 1, 10, 100 and so on, and, can make calculations tedious. Instead, many countries have opted to use a near variation of the Renard Series, that is, 1:2 or 1:2.5 ratio between adjacent denominations of currency which means that the denomination should be twice or two and half times of its preceding denomination.
According to currency experts, such a ratio allows exchange of value ordinarily in a maximum of three denominations. In India, we have currency denominations of Rs. 1, 2, 5, 10, 20, 50, 100, 500 and 2000. As such, in the lower end of the denomination series, Rs 200 is the missing one.
To achieve the optimal system of currency that would minimize the number of denominations while increasing the probability of proffering exact change especially at the lower end of denominations, there is a logical need to introduce the missing denomination of Rs. 200, which will make the present currency system more efficient.
The Ministry of Finance on Wednesday in an official notification clarified the introduction of new currency notes worth Rs. 200, citing the provisions vested under Sub-section (1) of Section 24 of the Reserve Bank of India (RBI) Act, 1934. "In exercise of the powers conferred by sub-section (1) of section 24 of the Reserve Bank of India Act, 1934 and on the recommendations of the Central Board of Directors of the RBI, the Central Government hereby specifies the denomination of bank notes of the value of two hundred rupees," the notification read.
While reports suggest that the new Rs. 200 currency notes will be rolled out in September, no official confirmation has been published.