The central bank [in India the RBI] has the monopoly of issuing currency notes which are legal tender. In India the RBI is empowered to issue notes of all denominations except one rupee note.
One rupee note is the standard money in India and is issued directly by the ministry of finance of the Government of India. The distribution of the one rupee note is undertaken by the RBI.
The advantages of the monopoly of note issue are
a] It ensures uniformity in the currency making it easy for people to identify it.
b] It facilitates effective state supervision.
c] It facilitates effective state supervision and therefore regulates the issue of paper currency by the central bank [ RBI].
d] The notes enjoy a distinctive prestige when they are issued by a single bank.
e] It enables the government to maintain control over undue credit expansion and avoids danger of over issue.
f] It creates confidence among people.
g] it helps to maintain price stability as central banks control credit creation.
The central bank keeps three considerations in view in its issue of notes, viz. uniformity, elasticity and safety.
The system of note issue differs from country to country. However certain principles are followed by the central banks while issuing notes, which has undergone changes over a period of time. Earlier it was full backing in terms of gold. Now it is the minimum reserve system followed by many central banks.
In India the RBI maintains a minimum reserve of Rs 200 crores in gold and government securities. Out of this Rs 115 crores must be in gold and Rs 85 crores in government securities.
Whatever the system, the three basic three considerations in issue of notes are uniformity, elasticity and safety