Why can't we print infinite money ??

                      RBI- The Money Printing Machine 

22nd June 2013, it was like any other Saturday, a much awaited week end. The week was loaded with office work and I had hardly got the opportunity to get some time out for me. As usual after getting up late, I logged into Facebook and Gmail, after having the delicious lunch my mother had cooked for me. The first half of the year had been very eventful for me so far, being shortlisted for interviews from all 6 new IIMs, an institute that I had dreamed to pursue my MBA education from. But almost all IIMs had declared their final lists and the colleges were about to start during first week of July. I had given up all hopes and was all set to prepare for the exam again this year and try my luck to pursue my management degree.

While I was busy in checking news feeds I could see a Gmail notification pop up regarding some MBA admissions. Such mails appeared frequently in my inbox with mails coming from unknown institutes who would have got my mail id through some way or the other. But this mail was different, I could not believe my eyes it was an offer letter from Indian Institute of Management Kashipur, one of new 6 IIMs. The reporting date was 29th June and I had to accept the offer by Monday and deposit the initial fees. Certainly I was happy, I informed my parents and they were happy too but it was going to take some convincing for me at my office to convince them that though I was enjoying my work, I would have to quit the organization to pursue my MBA. On Monday I talked to the executive director of my line of business and he was very kind and cooperative to understand the situation and allowed me to pursue my MBA and Thursday was going to be my last day. Relieved in my mind I came back from office on Monday evening after beating the Mumbai traffic to see my aunt and cousin sister Apurva who was enjoying her vacation after her 10th standard board examination who were waiting at my house to congratulate me on my achievement.

My aunt had a pen drive for me as a gift. After some time she went into to kitchen to help my mother to cook the dinner and I was talking to my young cousin sister who had made up her mind to take commerce as her career and was very excited to join the college life. “I would also want to do my MBA from IIM after my graduation” she said when we were discussing about her future path. “India has so much of poverty, then why doesn‘t the government print more money and give it to poor people making them all prosperous. I know with this it would be unfair on people who work hard to earn money but then give the equal amount to all, the rich would become richer but at least poor will be more prosperous” she added. This was a question which most of us had in our mind and some of us get answer to this question as late as during our MBA program. I was fortunate to get answer to this question from my sister who is a CA during my engineering studies and now onus was on me to explain this to my cousin sister who had just given her 10th standard board exam. I had a very difficult task on my hand to make it simple yet effective for her to understand and thought of explaining her through an example would be the right idea.

Imagine your teacher plans to take your entire class to a funfair, I started explaining her. Obviously you all would not have the money and hence the entire class is not prosperous, the teacher completely understands this and gives everyone Rs.200 which is enough for you all to enjoy all activities at the funfair. In the funfair there is a video game center with a very popular video game worth Rs.100 most expensive one of all, which all of you like and everyone wants to play it. When all students come to know regarding the video game center everyone gathers there making a big queue with almost 50 of you in it. Some of you enjoy the video game at Rs.100 and move to other activates in the funfair. The owner of the video game center senses the long queue and that there is a huge demand for the video game. Sensing the huge demand, he increases the video game rate and makes it Rs.150. Most of you still have Rs.200 and many of you still have Rs.150 as these would have directly come to the video game center before any other activities and can still afford it. The queue is still increasing and now there are 100 students waiting in the queue. The video game owner responds to the increase in the demand and increases the price further and makes it Rs.300. Now none of you can afford the video game. Remember initially the teacher had given you all Rs.200 which was enough to cover all the activities in the funfair including the video game. But since all of you had Rs.200, it led to increase in demand and hence increase in price of video game. 

Hence giving you all Rs.200 led to increase in price which is known as ―Inflation and hence printing more money and giving it to all would cause inflation and money with you would not be enough. This is a point where I corrected her and told her it is not a government of any country which prints the currency; every country has a central bank which has the authority to print the money and for India it‘s Reserve Bank of India which we popularly called as RBI. It is RBI‘s responsibly to keep an eye on the demand and supply imbalance. "Oh I never knew this. So only job of the RBI is to print currency right, to be the money printing machine for India?", I could sense the curiosity on Apurva‘s face by now. No, this not the only responsibility of RBI. Among many other two major responsibilities include providing and controlling liquidity to other banks and thus controlling inflation. “Now that you explained me what is inflation I understood it as increase in demand leading to increase in prices, but what is Liquidity"?

“Dinner is ready and will be served in 5 minutes” I heard a voice of my mom from the kitchen. This was going to be the first time I was leaving Mumbai to live hostel life and with only 5 days remaining, I was sure that my mom would have cooked my favorite dinner. But one thing I did not realize that it was almost an hour since I had started the discussion with Apurva. With a promise to explain about Liquidity and role of RBI, we both rushed to dining table where hot fish curry was waiting for us.

Image Source: http://www.rbi.org.in/commonman/Upload/english/Content/PDFs/MoneyKumarComic.pdf