After the monetary policy of June 8, RBI Governor Shaktikanta Das announced that the Government follows a measured approach towards Central Bank Digital Currency (CBDC). The RBI launched its first pilot on CBDC, the Digital Rupee-Wholesale (e₹-W) on November 1, 2022, and later the Digital Rupee-Retail (e₹-R) on December 1, 2022.
While the Digital Rupee-Wholesale is restricted to settlement of secondary market transactions in government securities, the Digital-Rupee Retail covers a limited user group comprising 13 banks, 50,000 customers, 5,000 merchants and 7.7 lakh transactions.
The main benefits of CBDC are:
Reduced currency management cost: As of March 2020, the total value of bank notes in circulation was ₹24.21-lakh crore, the same zoomed to ₹31.06-lakh crore by March 2022. Besides, the total cost of printing the currency notes escalated from ₹4,012 crore in FY21 to ₹4,985 crore in FY22. Though issue of CBDC may entail substantial fixed infrastructure costs, subsequent operating costs will be negligible.
Negligible settlement risk: If an importer/exporter wants to settle trade transactions in foreign currency, exchange rates may vary constantly, and also the settlement risk may arise due to time zone differences. However, CBDC may protect the interest of the importer/exporter by settling the transaction on real-time basis.
CBDCs could eliminate the need for inter-bank settlement and enable frictionless cross-border payments.
Financial inclusion: Distributing physical cash in certain locations, such as hilly terrains and islands, is a challenge and fraught with risks. However, to the extent that it becomes possible for CBDC to work regardless of power or internet connectivity, it becomes an advantage.
Enhanced transparency: End use of funds lent by banks would be ensured with CBDC due to its digital footprint.
Cyber security: Digital rupee transactions are highly secured and encrypted under distributed ledger technology.
Formalisation of economy: While cash is still the king, digital innovations are pushing central banks to address significant risks emanated from cryptocurrencies, such as money laundering, financing of terrorism, parallel economy, etc.
Digital rupee could, however, pose certain challenges that may have a bearing on financial stability, monetary policy, cost and availability of credit. The Bank for International Settlements (BIS) has advocated that an enabling legal framework is essential before issuance of CBDC, and it should be compatible with the objectives of monetary policy. Though CBDC may lead to a more efficient, instantaneous and regulated payments system, a calibrated approach is essential.
Srikanth is Director, National Institute of Agricultural Extension Management, Hyderabad, and Prasad is a former Assistant General Manager, SBI. Views are personal