Melting Indian Coins for Value

Because coins are metallic and durable over time, the value of the metal used to make them exceeds the face value of that coin. As soon as this happens, astute traders begin to collect coins with a view to converting them to metal and make money out of that difference. The material effect of this arbitrage is that the Central Bank and tax payers lose from the fact that the cost of making coins is well above their face value.

I argue that this practice is a carryover from the days when gold or bronze currency reflected the value of the valuable metal from which it was extracted. Small traders in India have noted the measurable differences in the alternative value of Indian coins and are furiously collecting the same, having them melted and making impressive returns on that investment in spite of the fact that it is illegal to do so. As Subhir Bhaumik writes here, the coins are melted down, sent to Bangladesh and converted into razors. The incentive derives from the fact that the difference in the face value of the coin and the total value of the razors is 3500%. In between those boundaries is an opportunity to extract profits after deduction of the costs of melting and transportation across the border into Bangladesh. As the story states, even beggars are sufficiently astute to engage in arbitrage.

It appears that notwithstanding the reduction of the metallic content of the coins at the mint by the government of India, the arbitrage continues and the attempts to flood the market with coins only fuels the trade. The only workable and stable policy option would be to raise the value of the rupee coin closer to 35 Rupees. Otherwise, the economics of it is truly clear and the shortage of the coins will continue.