Role of Currency

Currency is a generally accepted form of money as a medium of exchange, which is

issued by a government in the form of paper and coin and is circulated within an
economy. It is central to a nation’s monetary system and is traded in foreign exchange
markets.
The role of the currency has evolved since the humans were done with the barter system
and looked for more practical ways to exchange commodities and services.
The currency on its own holds no intrinsic value and has to be backed by an asset (like
the gold standard) or by the government decree (bank-notes or fiat currency). As of
today, all modern economies have adapted to the fiat system, as it permits the
government to regulate the currency supply in accordance with the monetary policy.
Monetary policy is the process by which the central monetary authority of a nation
achieves price stability and economic growth. In India, RBI controls money supply in
the market through various tools called instruments. These instruments are Open Market
Operations, Cash Reserve Ratio, Statutory Liquidity Ratio, Bank Rate Policy, Credit
Ceiling, Credit Authorisation Scheme, Moral Suasion, Repo Rate, and Reverse Repo
Rate.
The RBI may choose to lower the cash reserve ratio to increase the money supply in the
economy. A lower cash reserve ratio requirement gives banks more money to lend at
lower interest rates, which makes borrowing more attractive to customers.
Conversely, if the RBI increases the cash reserve ratio requirement to reduce the amount
of funds banks have to lend. The RBI uses this mechanism to reduce the supply of
money in the economy and control inflation by slowing the economy down.
Currency supply is one of the major regulators of a nation’s economic position. An
irrational increase in the supply of currency would lead to an abnormal increase in the
demand for goods and commodities and would cause a similar increase in the prices,
triggering a period of inflation.
The trade deficit is defined as the difference of a nation’s net imports and net exports
are one of the key metrics of its economic performance. Exchange rate of currency being
a direct influencer to the trade deficit, in turn, becomes a becomes an important factor
to a nation’s economic growth. A high-value currency is generally an indicator of
increasing imports and a weaker currency indicates increasing exports.
When a currency appreciates against other currencies, it loses its competitiveness in the
foreign markets leading to declining exports. On the other hand, a depreciating currency
lowers the price of a nation’s export and results in an increase in exports.
The role of currency is undeniably crucial in the global socio-economic positioning of
a nation. The stability of currency directly affects the quality of life owing to its direct
relation with employment and trade opportunities. In order to sustain its utility as such,
currency needs to be carefully administrated by a trusted authority. In a traditional fiat
currency, this role is undertaken by the government and central bank of the nation.
Even though social inclusion doesn’t have a direct relationship to the use of cash or
electronic payments, there is a clear relationship between social and financial inclusion.
Financial inclusion means that individuals and businesses have access to useful and
affordable financial products and services that meet their needs – transactions,
payments, savings, credit, and insurance – delivered in a responsible and sustainable
way. Access to a transaction account is a first step towards broader financial inclusion,
since it allows people to store money and send and receive payments.
Financial inclusion, then, does have a clear relationship to the use of cash and access to
electronic banking infrastructure. This, in turn, has a clear social inclusion component,
as it allows everyone to participate in our day-to-day economic society