Union Finance Minister Nirmala Sitharaman has said that the Reserve Bank of India (RBI) will soon issue it's own central bank-backed digital currency (CBDC).
The digital rupee CBDC is likely see the light of the day in the upcoming fiscal year.
What is CBDC ?
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| What is Digital Rupee and How Will It Work |
CBDC is a legal tender issued by a central bank in a digital format of Indian Rupee.
Central Bank-backed Digital Currency (CBDC) is the same as a fiat currency and its exchangeable with fiat currency. Only difference between them is their different forms. Fiat currency is physical and CBDC will be virtual currency.
Does CBDC affect banks ?
Yes, they could cause dislocations depending on the design of the CBDC It could lower the transaction demand for bank deposits, but they reduce settlement risks. Because CBDC is risk-free, it can lead to a shift away from bank deposits and reduce government guarantees on deposits. When banks lose deposits, their ability to create credit is constrained because central banks cannot lend to the private sector.
What is the difference between CBDC and Cryptocurrency ?
CBDC is a digital currency but it is not comparable to the private digital currencies that have mushroomed over the past decade.According to RBI , private digital currencies are at substantial odds with the historical concept of money because they are not commodities or don't have intrinsic value. While a CBDC is centralized, Cryptocurrencies are decentralized and do not represent any person's debts or liabilities and have no issuer.
Is it better than any other forms of digital payments ?
Answer is yes, imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over - the need for interbank settlement disappears.
CBDC would also enable more efficient and real-time globalisation of payment systems. It is possible for an Indian merchant to pay an American exporter on a real-time basis in digital dollars, without the need of an intermediary.
Do we need CBDC in India ?
There is thus a unique scenario of the increasing proliferation of digital payments combined with a sustained interest in cash usage, especially for small-value transactions.CBDC is unlikely to replace cash usage. The high currency-to-GDP ratio, If changed to CBDC , would cut the cost of printing, transporting, storing and distributing currency.
Why do we need CBDC ?
With the decreasing usage of paper currency, there is a need to popularise the electronic forms of currency which becomes efficient in high physical cash usage economies like India and Germany. Also, this will be the substitute for private digital currencies like bitcoin, etherium, ripple, etc.
How will CBDC change Monetary Policy ?
Historically, monetarists targeted the supply of broad money through bond purchases, sale and purchase of currencies and dabbling with the reserve ratios of banks. However the interest for money became unstable when finance went global in the beginning of the 1990s , forced central banks to target interest rates. Now with CBDC, they could assess demand for money and get a better handle on their policies.
What is RBI planning ?
The RBI has been looking at use cases and working out a phased implementation strategy for the introduction of CBDC with little or no disturbance. According to the the central bank, crucial elements around the design and utilization of a CBDC should be explored before its presentation. The central bank is working out models on retail and wholesale use of CBDC.
WHEN IS THE LAUNCH ?
Even if the RBI is ready, it may not be possible until the crypto law passes in the Parliament. It would also require amendments to the RBI Act, the Coinage Act, the FEMA, and the information Technology Act since existing legal provisions were made in view of paper currency in mind.