THE CONTEXT: The Reserve Bank of India is planning pilot projects to assess the viability of using digital currency to make wholesale and retail payments.
Analysis
- India is already a leader in digital payments, but cash remains dominant for small value transactions.
- An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
- A high-level inter-ministerial committee set up by the Finance Ministry had recommended the introduction of a Central Bank Digital Currency (CBDC) with changes in the legal framework including the RBI Act.
BENEFITS OF THE CBDC
- The cost of printing, transporting and storing paper currency can be substantially reduced given fairly high cash to GDP ratio in India.
- The advent of private virtual currencies is another reason. If these private currencies gain recognition, national currencies with limited convertibility are likely to come under some kind of threat.
- Transacting with CBDC would be an instantaneous process as the need for interbank settlement would disappear as it would be a central bank liability handed over from one person to another
- Moreover, foreign trade transactions could be speeded up between countries adopting a CBDC.
- They could enable a cheaper and more real-time globalisation of payment systems — it is conceivable for an Indian exporter to be paid on a real-time basis without any intermediary.
- The risks of dollar-rupee transactions, the time zone difference in such transactions would virtually disappear.