The digital rupee

CBDCs are essentially fiat currencies issued in the virtual/electronic form. Their appeal or the interest in issuing them has gained traction with the rapid surge of cryptocurrencies, the increasing popularity of blockchain technology, and the benefits that many argue stem from its adoption. Among the likely benefits claimed by advocates of CBDCs are the acceleration of financial inclusion, lower costs for financial transactions, especially in the case of cross-border transactions, the advantages of an alternate payments system, the creation of another instrument in the monetary policy arsenal of central banks, the likely adverse impacts on corruption and money laundering, among others. However, to what extent these benefits actually materialise will vary from country to country depending on its specific economic scenario. On the flip side, though, there are several possible risks associated with the introduction of CDBCs. In the case that retail CBDC accounts are interest bearing, there are obviously implications for the banking system. It is also possible that during periods of extreme uncertainty, depositors may choose to migrate away from commercial banks, causing financial upheaval. Then there is also the question of whether CBDCs will offer the same degree of anonymity as cash does.

Recently, RBI Deputy Governor T Rabi Sankar has said that the central bank is “working towards a phased implementation strategy” and will examine the CBDCs in the wholesale and retail segments. However, as several economists have pointed out, while some benefits may accrue at the wholesale level, the real transformation, and the challenge as well, lies at the retail level. Considering the wider economic implications, the central bank must carefully weigh the pros and cons. It must proceed cautiously, remaining mindful of the various issues, the design considerations and the implications surrounding the introduction of the digital currency.