The RBI (Reserve Bank of India) owns a printing press (for paper rupees) and a mint (for coins). The RBI decides how much money to print and mint based on inflation and demand for cash (how much paper money and coins people use in India as opposed to debit cards or other electronic transfers of money).
Reserve Bank of India
The Reserve Bank of India is responsible for printing, minting and distributing rupees. The RBI is also responsible for monetary policy (such as setting the basic interest rate) and keeps statistics on financial information such as exchange rates with foreign currency, investment and savings.
After rupees are printed and minted, the RBI sends them to the 18 regional offices. These offices distribute them to commercial banks, and from there they reach the public through bank and ATM withdrawals.
Currency chests are stocks in commercial banks around India where the RBI puts rupees for local distribution, so that circulation is not limited to the 18 cities where the RBI has regional offices. As of mid-2006, the RBI had 4,428 authorized currency chests around India.
Demand for currency depends on how many people are using cash rupees as opposed to checks and debit or credit cards. The RBI estimates this using economic growth rates, the replacement rate (how many worn and dirty notes and coins are being destroyed) and stock requirements (how many physical rupees the government and commercial banks must have on hand).
The RBI routinely takes worn and dirty notes out of circulation. When rupees reach the RBI, employees evaluate them using quality standards. Some are put back in circulation, while worn and dirty notes are incinerated and replaced with new notes, and coins are melted down at the mint and replaced with new rupee coins.