Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Tue, 14 Jun 2011

Cryptic RBI announcement on banknote numbering

The Reserve Bank of India issued a cryptic press release yesterday saying:

With a view to enhancing operational efficiency and cost effectiveness in banknote printing at banknote presses, it has been decided to issue, to begin with, fresh banknotes of Rs 500 denomination in packets, which may not necessarily all be sequentially numbered. This is consistent with international best practices. Packets of Banknotes in non-sequential number will, as usual, have 100 notes. The bands of the packets containing the banknotes in non-sequential number will clearly be superscribed with the legend, “The packet contains 100 notes not numbered sequentially.”

The confusion comes from the three phrases “enhancing operational efficiency and cost effectiveness in banknote printing”, “to begin with”, and “international best practices” each of which gives a different idea of what this is all about. My very limited understanding of the subject is that there are three reasons for non sequential numbering of currency notes:

  1. The most important and best known is the checksum or security reason seen principally in euro banknotes. The euro banknote contains a checksum and therefore every packet of freshly printed notes is non sequentially numbered – ignoring the factors below, consecutive notes in a packet are nine numbers apart: Z10708476264 would be followed by Z10708476273. This would truly be consistent with “international best practices”, but this can be ruled out because the press release clearly says that only some packets will have non sequential numbers.
  2. The second is the replacement note reason which arises when there are defects while printing a sheet of notes. The defective note is removed and is replaced with a replacement note which usually has a different number in a totally separate replacement note series (for example, star series in India). This is ruled out because it would not be consistent with the phrase “to begin with”. Star series notes were introduced in India five years ago. The annual policy statement for 2006-07 stated:

    Currently, all fresh banknote packets issued by the Reserve Bank contain one hundred serially numbered banknotes. In a serially numbered packet, banknotes with any defect detected at the printing stage are replaced at the presses by banknotes carrying the same number in order to maintain the sequence. As part of the Reserve Bank’s ongoing efforts to benchmark its procedures against international best practices, as also for greater efficiency and cost effectiveness, it is proposed to adopt the STAR series numbering system for replacement of defectively printed banknotes. A ‘star series’ banknote will have an additional character, viz., a star symbol * in the number panel and will be similar in every other respect to a normal bank note and would be legal tender. Any new note packet carrying a star series note will have a band on which it will be indicated that the packet contains a star note(s). The packet will contain one hundred notes, though not in serial order. To begin with, star series notes would be issued in lower denominations, i.e., Rs.10, Rs.20 and Rs.50 in the Mahatma Gandhi series. Wide publicity through issue of press advertisements is being undertaken and banks are urged to keep their branches well informed so as to guide their customers.

  3. The third reason that I am aware of is the column sort. This too arises from defective sheets. The defective sheets are first cut into columns and the “good” columns are cut into notes and packed into bundles which will not be sequentially numbered because of the missing “bad” columns. It does enhance “operational efficiency and cost effectiveness in banknote printing”. It is of course internationally common simply because DeLaRue uses it, and they print notes for many countries around the world. But in light of the developments last year, DeLaRue is not exactly a paragon of “international best practices”.

So what exactly does the RBI mean in its cryptic press release? I fail to see the need for “constructive ambiguity” when it comes to the numbering of banknotes. Any comments that would clarify my understanding of this would be welcome.

Posted at 16:16 on Tue, 14 Jun 2011     View/Post Comments (2)     permanent link




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