One of the prime highlights of the Union Budget 2022 was the announcement of central bank-backed digital currency (CBDC) by finance minister Nirmala Sitharaman. The digital rupee to be issued by the Reserve Bank of India will be rolled out in the new fiscal year.
In a first for India, the CBDC has left everybody wondering as to what exactly a digital rupee would and how it would work. In the simplest words, CBDC is the legal tender issued by a country’s central bank in a digital form. Except for its form, it is just like the fiat currency and is transactable.
How is CBDC different from Cryptocurrency?
With the backing of the RBI, CBDC is centralised. On the other hand, cryptocurrencies are decentralised, with no issuer and they do not represent any person’s debt or liabilities.
Is CBDC better than other forms of digital payments?
Yes, as it could reduce the need for an interbank settlement. Moreover, the digital currency would lead to a better real-time and cost-effective globalisation of payment systems. With this, any Indian trader could easily pay an overseas buyers without the need of an intermediary.
Would CBDC have an impact on banks?
Yes. CBDC can help reduce transaction demand for bank deposits, but they also cut settlement risks. Moreover, the digital currency can also slash the dependency on bank deposits, thus cutting government guarantees on deposits.
Is digital currency needed in India?
Practically, CBDC will not replace the cash usage in India, at least anytime soon. However, India switches to digital currency, it would slash the cost of printing, transporting, storing and distributing currency. Also, with digital payments mushrooming and usage of paper currency diminishing, a push to electronic forms of currency is needed.
What would CBDC’s impact be on monetary policy?
In the past, the supply of money was tracked through bond purchases, sale and purchase of currencies and tinkering with the reserve ratios of banks. However, CBDC usage could analyse the demand for money and also improve policy management.
When will CBDC launch?
The launch doesn’t seem to happen before the crypto law is passed in Parliament. For the roll out of CBDC, amendments would have to be made in the RBI Act, the Coinage Act, the FEMA, and the IT Act as these legal provisions were made bearing paper currency in mind.