The future of CBDC (Digital Rupee) in India

Central Bank Digital Currency (CBDC) is the digital legal tender issued by the Reserve Bank of India and will simply be the Digital Rupee. In its concept note released on 7 October 2022, RBI proposed the CBDC in two forms – retail and wholesale. Accordingly, these two types of CBDC are referred to as CBDC-R and CBDC-W.

Central Bank Digital Currency - An overview

The CBDC will have the same characteristics as a sovereign currency and have the same exchange value. Compared to other forms of digital money, CBDC is different as it is a direct liability for the RBI.

The first pilot program on the wholesale segment of digital currency was initiated on 1 November 2022. The pilot will test the settlement of government securities transactions in the secondary market. The nine banks participating in this pilot are IDFC FIRST Bank, State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank and HSBC.

The first pilot of the CBDC-R has been launched in select locations for a closed group of customers and merchants. Future pilots will test other wholesale transactions and cross-border payments, using the learnings from the first pilot.

The future of CBDC (And is CBDC the future?)
 

The RBI expects the Digital Rupee to bring more efficiency to monetary and payment systems. It is also expected to expand financial inclusion and strengthen the nation’s economy. However, CBDC is not seen as a replacement for the current currency system. Instead, it is expected to complement the system with a digital alternative.

Here are a few reasons why CBDC’s impact is expected to be positive:

• It is centralised:
  
  CBDC will be issued by the RBI and will come with an absolute sovereign guarantee. This is the major difference between cryptocurrencies and CBDC. CBDCs of any country are backed by the country’s central bank; crypto, on the other hand, has no underlying asset and is private money. RBI governor Shaktikanta Das has even called the crypto system a clear danger.
  
  
• Offers transparency:
  
  CBDC will bring more transparency to online transactions. As a convenient form of electronic central bank money, it will add safety and liquidity to transactions. It will be a legal tender-based payment option and make cross-border payments more transparent. Being permissible in respective countries, the CBDCs of different countries will be compatible and interoperable while making cross-border CBDC payments. In cross-border remittances, SWIFT is already in place, with a presence across 11,000 entities in over 200 countries. Being a currency-agnostic platform, SWIFT will be instrumental in incorporating Digital Rupee as a medium of transaction. Being centrally driven, CBDC will ensure complete tax and regulatory compliance, thus pushing the informal financial system to a more formalised structure.
  
  
• Better reach:
  
  One of the major challenges for the government in disbursing money is the money’s journey itself. Digital Rupee can ensure that money spent on government schemes and programs reach the beneficiary and is used for the intended purposes only. From flood relief to LPG subsidies and agricultural cashbacks, with Digital Rupee the flow of money can be tracked to the ultimate beneficiary with relative ease and efficiency. For instance, LPG grants can be transferred to beneficiaries through CBDC. This CBDC can then be used for payments to authorise LPG agencies only. Any other use of such directly transferred CBDC would only get rejected. This can revolutionise the way government money is used and spent.
  
  
• Offers ease of use:
  
  As Digital Rupee gains more popularity at a retail level, there will be reduced dependency on cash, and a lesser overall currency management requirement. The retail CBDCs are likely to be stored by end-users in their e-wallets. This will make it convenient for the public and businesses to transact in a completely digital mode.
  
  
• Real-time payments:
  
  Settlement and security clearing processes in transactions have a lag of more than one day. CBDC will significantly increase the efficiency in these processes, which will reduce the settlement time, as Deloitte India Partner Monish Shah noted. It will also reduce the costs involved in payment reconciliations, as settlements will move closer to real-time.
  
  
• Cannot be physically damaged:
  
  A part of the high cost involved in the management of physical money is its physical wear and tear. CBDC will eliminate the costs of phasing out soiled and torn notes, their transportation, insurance costs, and logistics involved. Notably, the cost of printing low currency notes amounts to around Rs 1 per note, while high-value notes can cost between Rs 2.5 to Rs 4.
  
  
• Lending:
  
  When introduced at the retail level, Digital Rupee will bring the banking customer closer to the RBI. From CBDC wallet creation with RBI to getting access to loans and banking products, credit history can be digitally created directly with RBI. CBDC will enable more transparent creditworthiness checks of businesses. Similarly, RBI will be better informed while disbursing packages to beneficiaries with the use of CBDC data. While RBI would not join the intermediary banks in retail banking, CBDC will provide all these benefits and databases to the entire Indian banking system hierarchy.

In Conclusion
 

By introducing the digital rupee, India has joined the list of selected countries which are at various stages of Central Bank Digital Currency research and initiation, including China, the USA, Russia, and the Bahamas. CBDC-W is also in a pilot phase in Singapore. It must be noted that countries are taking their time in drawing a conclusion, with many countries still undecided after much deliberation.

In India, RBI has outlined the benefits and risks of CBDC and continues to assess its impact on the regulatory, monetary, and fiscal policies of the country. With these considerations as the baseline, RBI is expected to continue with the initial trials of CBDC at wholesale and retail levels in the days to come.

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