Do we really need the e-rupee?

Source: The post is based on the article “Do we really need the e-rupee?” published in The Business Standard on 11th October 2022.

Syllabus: GS3 – Indian Economy and issues relating to planning, mobilization, of resources, growth.

Relevance: About concerns and benefits of e-rupee

News: Recently, the Reserve Bank of India (RBI) released a concept note on an Indian central bank digital currency or CBDC.

About the concept paper on e-rupee

What is the state of present monetary and financial systems?

The Indian monetary and financial systems are mainly bank-based, with money taking the form of cash and bank deposits. In this system, digital payments were based on virtual money created by commercial banks.

After the Unified Payments Interface(UPI), India became the pioneer in developing digital payment systems. Using the UPI platform, apps like Google Pay, Paytm and PhonePe have popularised digital payments tremendously.

Recent data indicates that demand for cash may have even gone up once the pandemic started retreating. This seems to indicate that even if a CBDC is introduced as a form of legal tender. It may play a secondary role to cash.

What is the need for e-rupee?

Along with other reasons, there is a massive push from China to establish the digital yuan, not only as a domestic currency, but also to be used for cross-border payments with their trade and investment partner countries.

Once the digital yuan gains acceptability as a global currency, it will only be a matter of time before it starts flowing into the Indian economy. This leads not only to the possibility of a dollarisation-type problem in the conventional sense but also grave data security risks. So, it is in India’s interest to limit this possibility by introducing the e-rupee.

What are the benefits of e-rupee?

The e-rupee can make the monetary system more efficient and the financial markets more stable in a number of ways. For instance,

Monetary system benefits of e-rupee: e-rupee will a) Reduce the cost of physical cash management, b) Push the monetary system towards more digitisation, c) Cash is used significantly in small-value transactions. These transactions may be redirected towards the e-rupee if reasonable anonymity is assured.

Benefits of e-rupee in financial markets: a) As the e-rupee will provide an alternative to crypto assets, it will provide financial stability in the economy, b) Provide the public with a risk-free virtual currency.

Benefits of e-rupee on payments infrastructure: As e-rupee 1) Provide the domestic payments system with an additional channel, 2) Increases resilience by providing payment services even outside of the commercial banking system, 3) Diversify the range of payment options, particularly for e-commerce, 4) Helps the international payments infrastructure by making cross-border transactions faster and far less costly, and 5) Ease frictions in cross-border payments that is critical for international trade.

Increase the welfare for poorer sections through financial inclusion: This is because the e-rupee can a) Make financial services more accessible even to the unbanked and underbanked population, b) Offline functionality as an option will allow the e-rupee to be transacted without the internet. This will enable access in regions with poor or no internet connectivity.

What needs to be done to increase the benefits of e-rupee?

India needs to a) Establish global protocols on the development of cross-border use of CBDCs, b) Create a credible and working CBDC.