Why has the Reserve Bank of India introduced an e-rupee?

Source: The post is based on an article “Why has the Reserve Bank of India introduced an e-rupee?” published in The Hindu on 5^th December 2022.

Syllabus: GS 3 – Indian Economy

Relevance: concerns associated with digital rupee

News: The Reserve Bank of India has launched the digital rupee on a pilot basis.

What is the digital rupee?

Must Read: RBI unveils features of digital rupee, plans to launch pilot soon

What is the difference between digital and physical form of rupee?

Both forms of rupee are same and deposits held in banks can be converted into digital rupees and vice-versa.

However, the difference is that interests are paid on the deposits held by banks but there will be no interests paid on digital rupees stored in the wallet.

What is the need of the digital rupee?

Must Read: Do we really need the e-rupee?

What is the risk associated with the digital rupee?

Banks generate loans depending on the amount of money, it has but people might shift away their deposits from banks to wallets looking at the low interest offered by the banks.

This shifting will hinder the activities of the banks especially in the case of giving loans. It should be noted that the ability of banks to create loans is influenced by the amount of cash they hold.

However, the virtual money will reduce bank’s dependencies on maintaining sufficient cash deposits before expanding loans. This can help banks to get free from the risk of bank runs which acted as a restraint for the banks for expanding loans.

What are the arguments against the digital rupee?

Some of the people are against the idea of digital rupee. They say that digital currencies will give power to central banks to supervise economic activities.

This could act as hindrance to economic growth if certain economic activities are considered illegal by governments.

Further, digital currencies cannot replace crypto currencies as private cryptocurrencies have demand against certain investors because of their greater purchasing power than the fiat currency.