[Economy Q] RBI prints more money when and its implication on gold and forex reserves

[Economy Q] RBI prints more money when and its implication on gold and forex reserves

Tanvir Khan asked

1.)What are the situations at which rbi print notes?

RBI prints new notes to replace the old torn-out notes and to meet the money demands of a rising economy.

As you know, if people have x amount of money but there are not sufficient items in market to purchase, then there will be inflation (price-rise).

So RBI's job is to maintain the money supply (liquidity) in the market, to prevent inflation.

If there is shortage of money in the market, RBI generally alters its SLR,CRR,Repo,Reverse-repo to increase the money supply.

Lets imagine,
We need to buy new F16 fighter-plane from America, they ask for 1 billion dollar$.
So Prime minister Manmohan Singh asks the RBI to print new notes of 50 billion rupees and pack them in a big suitcase. Then he takes it to Forex market, gets the Rupee converted into dollars and buys the fighter-jet. But the same broker at Forex market, will use those 50 billion rupees to buy all the tea,Basmati rice, onion, potato and everything in India and then export it to other countries!! So shortage of items for Indian consumers = price rise=inflation.
So RBI cannot print notes indiscriminately.

However an expanding economy like us, requires more money so people can take loans and start business etc. Even after altering SLR,CRR,Repo,Reverse repo, there will be still demand for money So RBI must be printing more money after looking at the indicators like IIP, GDP etc. Besides printing money also costs money. So I think there will be some complex formula, but I'm not aware about it.

2.)Sufficient gold or forex reserves is necessary to print notes by the rbi but please explain me what happens to the forex or gold reserve as soon as the indian notes are printed. i.e., if the rbi has 4000 u.s. dollars as forex reserve and a situation occur to print 100000 rupee notes (2000 us dollars=100000)(so after printing the notes, will the forex reserve of india become as 2000 us dollars or will it remain at 4000 us dollars itself.
Please explain.....

Nothing happens to forex or gold reserve. It remains as it is.
Prior to World war-II era, nations used to print only as much currency as the gold-reserve they had. Nowadays currencies are not linked with gold.

However, RBI uses special printing-machines, papers and inks imported from Switzerland etc. to print the new currency notes. so obviously RBI has to pay in dollar$$ while buying the raw material. So in that sense some of its forex re$erve will deplete.

RBI can never link the money-printing to gold or forex reserve because that'll sevearly limit its capacity to meet the money-demands of a rising economy.

Sidenote:
you can get brand-new fresh notes and coins from RBI branch, but before you have to wait in long queue while the RBI staff sells it to the agents from the backdoor (Rs.10 Commission on Coins worth Rs.500). And those agents sell it to merchents, but merchants never use it and insist on you to buy toffees worth Rs.1,2,3 instead of returning the change. (as seen on sting-operation by E-TV) So, in that sense, artificially created shortage of 'change' also boosts economy!