In her Union Budget Speech, the Finance Minister announced a proposal to issue a Digital Rupee by the Reserve Bank of India (RBI) starting financial year 2022-23. What functions might a Digital Rupee (synonymously, a central bank digital currency or CBDC) issued by the RBI, serve? Identifying the use-cases of a CBDC is critical to the design of the Digital Rupee, and the design of the infrastructure for its issuance, distribution and transfer. Understanding its use cases is also key to conceptualizing the amendments required to the RBI Act to enable the RBI to issue the CBDC. As a first step, we should ask: how would the average household or depositor benefit from a CBDC? What is its utility to businesses, small and large alike?
World over, the unique selling point of CBDCs is ‘cheap and instant settlement’ of payment transactions. Many have, however, argued that the retail payment systems in India – namely, the Immediate Payment Service (IMPS), the Unified Payments Interface (UPI) and the applications built on them (BHIM, GooglePay, WhatsApp payments, etc.) – have made digital payment transactions in India cheap, accessible and efficient for the average Indian consumer. A small-sized RBI survey conducted in 2021 shows that for transactions in excess of Rs. 500, nearly 60% of the survey respondents preferred digital payment instruments. This suggests that the current array of digital payment instruments in India are meeting Indian consumers’ payments related needs.
Indeed, a CBDC’s potential in every jurisdiction might vary depending on the efficiency of its payment systems. If the domestic payment system of a country is efficient, it is hard to see an immediate use case for CBDCs to the average consumer. In this post, leaving aside the issue of efficiency of payments, I emphasize two use-cases of a CBDC to households and businesses in India.