(B) Because it is issued by the Reserve Bank of India on behalf of the Central Government.
The Reserve Bank of India issues currency notes on behalf of the Central Government. Indian law legalises the rupee as a medium of payment that cannot be refused, making it universally accepted.
Source: Modern Forms of Money, Chapter 3
The key fact examiners test here is the distinction between Central Government (correct) and State Government, State Bank of India, or World Bank (all wrong). The passage clearly states: "the Reserve Bank of India issues currency notes on behalf of the central government." Do not confuse RBI (issues currency) with SBI (a commercial bank). This is a frequent error in MCQs.