"Until the first week of June, demand was for half-a-million rupee coins a day in Kolkata. Now we are distributing two million rupees worth of coins a day," Shiojee Rabidas, of the Reserve Bank of India, said.
"We are mystified by the sudden rise in demand," Rabidas added.
But police said they know where many of the coins have gone.
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"We raided a foundry in northern part of the city where the coins were being melted," said deputy police commissioner Gynwant Singh.
"We got information that the coins are melted to turn into bars and smuggled to Bangladesh where finished products like razor blades are produced out them," he said.
"A razor blade in Bangladesh costs nearly four rupees and at least four blades could be produced from a one rupee coin," he said, adding that 4.
85 gram (0.14 ounce) one rupee coin is made of stainless steel.
Despite the raid, the shortage has continued, affecting daily transactions.
Bus operator Biswanath Das said he stood in line for four hours this week at the central bank to get enough coins for change.
"Many private buses have stopped plying due to the shortage of coins," he said, adding that the Reserve Bank needed to produce emergency supplies as beggars had become the main source of small change.
Businesses also say the shortage has made daily transactions difficult and have taken to giving customers goods in kind. "I was supposed to get back 50 paise (half a rupee). But the shop-owner expressed helplessness and gave me a toffee instead," said Nomita Dutta, a housewife in Kolkata.