The world of money is changing, and India has made impressive progress towards innovations in digital payments. India’s central bank, Reserve Bank of India (RBI), has is now focusing on Central Bank Digital Currencies (CBDC). Things have been a little hazy around the use of cryptocurrencies in India. To those following the market, it was clear for some time that the government did not want cryptocurrencies to have a free run as a speculative asset class. In her 2021-22 budget speech, finance minister also announced that RBI will launch a digital currency.
It took some time but then it happened. The government announced the introduction of the CBDC (Digital Rupee – e₹) – a Reserve Bank of India (RBI) controlled and managed digital counterpart of the country’s fiat currency. The RBI launched the pilot in wholesale and retail segment (e₹-W) within a closed user group (CUG) and selected banks.
What’s RBI concept of CBDC?
- Reimagined and digital version of the physical currency same as sovereign paper currency
- Exchangeable at par with the existing currency and accepted as a medium of payment
- A legal tender and a safe store of value
Is this the right time and is it absolutely necessary?
There are compelling reasons for India to pursue both a retail and wholesale CBDC. In terms of retail payment, India has already achieved a rapid adoption of digital payments thanks to UPI. CBDC can further streamline the payments process and level it up by a few notches. It can offer a new payment method and broaden the number of payment possibilities, especially for e-commerce. It is comparable to a cash transaction, except that instead of banknotes, CBDC is exchanged, resulting in immediate settlement. This can boost the payment system’s efficiency.
In wholesale banking, ‘Cross Border Payments’ is especially ripe for change and could benefit from these modern technologies. According to the World Bank, India is the greatest recipient of remittances in the world, having received $87 Bn USD in 2021, with the United States being the largest source, accounting for almost 20% of these payments. In 2022, It went up by 12 percent to reach $100 Bn. The cost of sending remittances to India is therefore of essential importance to millions of Indians living abroad. Current remittance options can be expensive or fraught with risks due to (mis)use of informal / illicit routes.
It is hard to predict now if the bang for the buck will lie in serving a huge untapped domestic market or the potential for cross-border engagement through wholesale CBDCs.
In the end, we expect it to reduce currency management costs, promote financial inclusion, bring resilience, efficiency, and innovation to the payments system, improve the efficiency of the settlement system, stimulate innovation in the cross-border payments space, and avoid the undesirable consequences associated with the increasing use of private virtual currencies, i.e., Cryptos.
The Big Question
Does India’s CBDC tick all the boxes when it comes to the key reasons which make crypto popular among the people? We are yet to see that. RBI must demonstrate its utility beyond payments to encourage uptake.
Above all of this, India has an edge.
India has a distinct advantage when it comes to payments. It has a far more advanced real-time, web-enabled payment infrastructure called UPI. India can piggyback on this existing infrastructure and build its own end-to-end platform. It certainly is practical, scalable and offers a faster time to market. With the digital rupee as a central anchor, RBI can expand these systems from domestic to international markets, offering cross border payment systems like SWIFT some serious competition.
The lofty aspiration and the ‘if‘s
It could help settle cross-border transactions, replacing other global currencies.
If RBI does it well, it can fundamentally alter how the Indian rupee is seen, perceived, and used globally.
If the Euro and the Yuan can establish themselves as viable alternatives to the USD, India may make a claim at that table with a digital rupee as a first gambit.
If this research area is of interest to you and you are exploring diverse use cases for CBDCs in India, I would like to hear your thoughts on this topic. You can ask your account manager to help you connect or can directly schedule a briefing or inquiry from here.
