At a time when digital payments have gained traction and billions of digital financial transactions are reported every day, the Reserve Bank of India’s announcement last week to launch a pilot project of e- rupee has ignited a debate about the central banking digital currency (CBDC).
This time, the thriving, cheap and enormous reach of the country’s existing digital payment system has raised a big question mark on the relevance of the proposed e-rupee expected to hit the market in the current financial year.
India’s payment system witnessed dramatic developments when Covid-19 pandemic compelled to bank upon digital mode of financial transactions. Currency notes were declared as one of the carriers of the deadly virus and here emerged the need for a digital payment system.
During the last two years of pandemic, millions of consumers first time boarded the digital payment system and are mostly banking upon the digital mode for their routine financial transactions.
Pertinently, the Reserve Bank of India (RBI) issued a concept note on Central Bank Digital Currency (CBDC) wherein it has mentioned that the aim is to complement, rather than replace, current forms of money.
The digital currency is envisaged to provide an additional payment avenue to users, and not to replace the existing payment systems. The RBI paper further states that the system supporting the digital rupee will further bolster India’s digital economy, make the monetary and payment systems more efficient and contribute to furthering financial inclusion.
Introduction of CBDC in the country’s payment system is in line with the statement of the RBI Governor, Shaktikanta Das. By the end of last year he stated that the apex bank could come up with a pilot of its fiat digital currency. Earlier, during the last monetary policy review on August 6, 2021 Deputy Governor of the RBI, T Rabi Sankar, had said that the central bank is expected to launch a fiat digital currency by December.
Notably, the Central Government had announced the launch of the Digital Rupee — a Central Bank Digital Currency (CBDC) from fiscal year 2022-23 onwards in the Union Budget on February 1, 2022.
Basically, the idea of central bank digital currencies digital (CBDCs) was making rounds for the last few years. It was only due to the outbreak of the coronavirus pandemic that forced the central banks around the world to seriously explore the option of launching official digital currencies.
It’s worth mentioning that the Central Bank Digital Currency (CBDC) is an electronic form of central bank money that citizens can use to make digital payments and store value.
According to the concept note, the digital rupee or e-rupee would be the legal tender issued by the Reserve Bank of India. It is the same as a sovereign currency and is exchangeable one-to-one at par with the fiat currency, the RBI concept note mentioned.
It would differ from existing digital money available to the public because a digital rupee would be a liability of the Reserve Bank of India, and not of a commercial bank.
There would be two types of the proposed digital currency - general purpose or retail (CBDC-R) and wholesale (CBDC-W). Retail CBDC can be used by all including the private sector, non-financial consumers, and businesses. Wholesale CBDC is designed for restricted access to select financial institutions.
While retail CBDC is an electronic version of cash primarily meant for retail transactions, the wholesale CBDC is designed for the settlement of interbank transfers and related wholesale transactions.
However, it needs to be understood that a CBDC is not a crypto currency. It is the digital form of a legal tender or you can call it a digital form of fiat currency that will ease financial transactions. The RBI describes this Digital Rupee as something that will provide a safe, robust, and convenient alternative to physical cash. The apex bank’s report said that depending on various design choices, it can also assume the complex form of a financial instrument.
Precisely, CDBC or a Digital Rupee would be exchangeable one-to-one with the government-issued money. It is the same as the legal currency we use. The only difference is that it would be in a digital form.
The digital rupee, as per the RBI concept note, could provide the public with a risk-free virtual currency that will provide them with legitimate benefits without the risks of dealing in private virtual currencies. It may, therefore, fulfill the demand for secured digital currency besides protecting the public from the abnormal level of volatility that some of these virtual digital assets experience. Thus, safeguarding the trust of the common man in the Indian Rupee vis-à-vis proliferation of crypto assets is another important motivation for introducing CBDC.
In the given environment when use of online services are gaining momentum and witnessing mass movement of people towards the online platforms to conduct various financial transactions, the functioning of the formal digital currency (e-rupee) in the monetary system would be worth watching. Precisely, amid this never-seen-before surge in online transactions, experts have started dishing out their opinions about embedding of the Central Bank Digital Currencies (CBDCs) in the country’s digital payment system with a series of question marks. These opinions suggest that the digital rupee won’t be the most preferred alternative to the fast expanding online platform. All over the world, banks, institutions, and governments are currently engaged in performing research and analysis on the economic and technical feasibility of introducing a new form of digital currency and its impact on monetary and fiscal policy.
Meanwhile, there are certain wrinkles attached with the digital currencies and need to be ironed out. Let me reproduce these issues pointed out by some experts.
One, if CBDCs are indeed efficient disintermediation vehicles for retail savers, this could adversely affect bank deposits and eventually growth of bank credit. Some central banks are contemplating ways of limiting retail and institutional CBDC holdings, through either hard limits or monetary disincentives. This needs greater public discussion.
Two, given the public preference for cash and the comfortable blanket of anonymity it offers, CBDCs have to create foolproof systems for privacy protection; recent developments have left the public wary of excessive state intervention in their lives.
Three, central banks will have to figure out how to manage cross-border flows vis-à-vis CBDCs and the attendant volatility because these eventually impact inflation and growth.
It’s fervently believed that Digital Rupee would increase the safety and efficiency of both wholesale and retail payment systems. On the wholesale side, a central bank digital currency would facilitate quick settlement of retail payments. It could improve the efficiency of making payments at the point of sale or between two parties.
Precisely, it would be a challenging task for the RBI to issue Digital Rupee. It comes with a host of technological, legal and economic issues that warrant careful examination and planning. Taking a lead to launch its own digital currency (e-rupee) when most of the countries are still engaged in thorough research about its impact on the monetary and fiscal policies, the delivery of e-rupee by the RBI is worth praising. However, the apex bank has to ensure that the monetary policy implementation and financial stability of the country is not jeopardized while rolling out a digital rupee.
(The views are of the author & not the institution he works for)
DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.