• Recently, in its Budget 2022-23, the Government of India announced that its central bank will issue a digital currency as early as 2022-23. It is one crucial decision that most major economies are refusing to make in a hurry.
  • The arguments in favor of digital rupee claim that an electronic representation of India’s legal tender will boost its digital economy. However, it is also important to evaluate the risks associated with a hasty transition to a Central Bank Digital Currency (CBDC).
  • The Reserve Bank of India (RBI) will issue the digital currency in the next fiscal which will be called Digital Rupee.
  • A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region).
  • The digital rupee will allow users to transfer purchasing power from deposit accounts into smartphone wallets in the form of online tokens, which like cash will be a liability of the Reserve Bank of India.
  • A digital rupee will be like banknotes, minus ATMs.

Arguments in Favor of the Digital Currency

  • CBDC aims to bring in the best of both worlds – the convenience and security of digital forms like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system.
  • The digital currency will mitigate the risk of losses that Indian depositors face when dealing with commercial banks.
  • Consumers may find an e-rupee to be a safer alternative to bank deposits, which underpin ₹76 trillion in annual real-time payments via apps like PhonePe, Google Pay and Paytm.
  • As purchases go online, the basis of trust in demand deposits, that they convert to cash at face value, may get reduced to a theoretical construct.
  • An e-currency could keep the notion of convertibility grounded in daily reality.
  • It could eliminate the need for an expensive network of correspondent banks to settle cross-border payments.
  • For Indians working abroad, sending money home will become simpler and cheaper resulting in huge savings for India, the world’s top recipient of remittances.

Arguments Against the Digital Currency

  • If e-cash becomes popular and RBI places no limit on the amount that can be stored in mobile wallets, weaker banks may struggle to retain low-cost deposits.
  • Even as these small banks lose that cushion, lenders may be reluctant to shed their loan assets and sacrifice profits.
  • Their less-liquid balance sheets could leave them vulnerable to bank runs.
  • All economies are mindful of the threat to financial stability and the advanced nations also worry about the dwindling use of banknotes, especially after Covid.
  • Unlike perfectly anonymous cash, most CBDCs will be designed in such a way that the central banks will be able to trace the spending.
  • However, transactions conducted with them may not be visible to payment apps, and fintech firms may lose access to some data being mined for cheap loans to those who don’t have collateral.

Way Forward:

  • With depleting usage of paper currency, there is a need to popularize electronic platforms of currency. This becomes more efficient in high physical cash usage economies like India.
  • However, a properly planned and well-evaluated implementation of such a crucial decision is important as hasty implementation may result in more losses than gains.
  • A digital rupee may well be a boon. For one thing, it may not be a bad idea for the monetary authority to use technology to put bank managements on notice that they need to stop taking depositors for granted.


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