IS RBI PLANNING A DIGITAL CURRENCY FOR INDIA?

What a central bank digital currency?

A Central Bank Digital Currency (CBCDs) is no different from the cash that we hold in our wallets, except that it exists in a digital form. The CBCDs will be held in a digital wallet that is supervised by central bank. In India it will be the RBI that supervises the digital rupee. RBI’s digital rupee will not directly replace demand deposits held in banks. Physical cash will continue to be used by banks and the people who wish to withdrawn cash from Banks can still do so.

Why are central banks issuing digital currencies?

Central Bank claim that there is increasing demand for digital currencies, which they wish to satisfy. Central Bank also believe that the cost of issuing currencies is far lower than the cost of printing and distributing physical cash. The RBI can create and distribute the digital rupee at virtually zero cost since the creation and the distribution of digital rupee will happen electronically. Another likely reason for introduction of digital cash may be to bring down the use of physical cash.

What are the risks in adopting digital currencies issued by Central bank?

Many fear that people may begin withdrawing money from their bank accounts as digital currencies issued by Central Banks one things that could prevent any large flight of capital from bank accounts to digital currencies is that bank accounts, unlike digital currencies, offer interest on deposits. When customers want to convert their bank deposits into, say, digital rupees, which offer the same sovereign guarantee as bank deposits, bank will have a smaller base on which to create loans, when banks customers wish to convert their deposit into digital rupee, the RBI will have to take these liabilities from the books of banks and onto its own balance sheet.

What lies ahead?

Speculations are that central banks will cap the amount of money that an individual can hold in the form of CBCDs. Central Banks may also have an object fresh money into banks to ensure that the ability of banks to create loans is not affected by depositers rush to digital currencies. CBCDs could eventually take over this crucial role that cash reserves play in the current banking system. The difference between CBCDs and loans created electronically by banks could turn out to be very little as both would simply be digital forms of the same currency. This could eliminate the risks of bank runs as banks will then no longer have to satisfy the cash demand of customers.