RBI shouldn’t rush the launch of India’s official digital rupee

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News: Rushing the implementation of a digital rupee is fraught with unnecessary risks.

What are the advantages and associated issues of a CBDC?


As researcher Bhargavi Zaveri observes, depositors at 21 Indian lenders have been restricted from withdrawing their funds due to bank distress in the last few years. A CBDC will mitigate the risk of losses that Indian depositors face when dealing with commercial banks.

– A CBDC could eliminate the need for an expensive network of correspondent banks to settle cross-border payments. For Indians working abroad, sending money home will become simpler and cheaper.


Threat to financial stability: If e-cash becomes popular and RBI places no limit on the amount that can be stored in mobile wallets, weaker banks may struggle to retain low-cost deposits. Their less-liquid balance sheets could leave them vulnerable to bank runs.

Moreover, as purchases go online, the basis of trust in demand deposits, that they convert to cash at face value, may get reduced.

Transactions conducted with CBDCs may not be visible to payment apps, and fintech firms may lose access to some data being mined for cheap loans to those who don’t have collateral.

What is the global situation wrt a digital currency?

Sweden: In India, banknotes account for about 15% of money supply, compared with 1% in Sweden. Yet, Riksbank is in no hurry to embrace a CBDC. After five years of weighing options, the Swedish monetary authority is still to take a final decision on whether to issue an e-krona.

USA: The US Fed is seeking the public’s views on whether to provide an official tender to compete against private stablecoins.

Europe: A digital euro is in a 24-month investigation. If all goes well, the European Central Bank may offer it by 2025. Japan may delay a call to 2026.

Why has India set an early deadline to launch a CBDC?

India recently announced that its central bank will issue a digital currency as early as 2022-23.

India’s rushed deadline seems to be at least partly a response to rising popularity of cryptocurrencies.

Another reason for hurry, may be a desire to compete with China’s e-CNY, which by early November had some 140 million individuals signed up for its e-CNY. But China has no national roll-out date, and Alipay and WeChat Pay retain their stranglehold on digital payments.

What is the way forward?

A digital rupee may not be a bad idea for the monetary authority to use technology to put out a message for the bank managements that they need to stop taking depositors for granted.

Still, that lesson is probably best administered after lenders have put the covid-related stress on their balance sheets behind them.

Besides, RBI must do its homework. The technology, blockchain or otherwise, will need to balance the often-conflicting goals of speed, scalability, auditability, security and privacy, something the Fed is trying to do as part of its Project Hamilton.

Given India’s vast digital divide, a protocol for offline use has also to be worked out.

Source: This post is based on the article “RBI shouldn’t rush the launch of India’s official digital rupee” published in Live mint on 8th Feb 2022.

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