October 7, 2022

Lukmaan IAS

A Blog for IAS Examination

RBI PLANS DIGITAL CURRENCY PILOTS SOON

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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.
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