- Use case for Digital Rupee Pilot program is to increase the efficiency of the interbank market
- Cryptocurrencies are driving innovation due to decentralised technology, which is leading to financial decentralisation and disrupting the traditional financial system
- The Digital Rupee system will boost India’s digital economy and improve financial inclusion
The Reserve Bank has begun testing of Digital Rupees through launch of Pilot program. SBI, BoB, ICICI, and HSBC are among the nine major banks chosen for the pilot project, which includes a mix of PUS banks, private banks, and foreign banks.
The use case is to increase the efficiency of the interbank market by using CBDC for wholesale funding transactions.
Payment systems are changing at a rapid pace, according to the RBI. Users today expect faster, easier payments at any time and from any location, mirroring the digitalisation and convenience of other aspects of life.
Near-instant person-to-person retail payment systems are becoming more common around the world. The rapid proliferation of private cryptocurrencies in recent years has attempted to challenge the fundamental concept of money.
Cryptocurrencies are driving innovation due to decentralised technology, which is leading to financial decentralisation and disrupting the traditional financial system. Cryptocurrencies have the potential to circumvent the regulatory framework, which is critical to ensuring the integrity and stability of the monetary and financial eco-system.
The Bank for International Settlements (BIS) surveyed 81 central banks and discovered that 90% of them are involved in some form of CBDC work, with more than half developing them or running concrete experiments.
In October 2020, the Reserve Bank established an Internal Working Group (WG) to conduct research into the introduction of CBDCs in India. Based on the recommendations of the Working Group, the RBI is launching pilot projects for the phased implementation of the Digital Rupee.
CBDCs may also enable more real-time, cost-effective seamless integration of cross-border payment systems. India has significantly transformed its payment system . Indian payment systems are available to both retail and wholesale customers year round and are largely real time. India has one of the lowest digital transaction costs in the world. Users in India have a wide range of transaction options, as evidenced by the fact that digital payments have grown at an impressive CAGR of 55% over the last five years.
The Digital Rupee system, backed by India’s cutting-edge payment systems that are affordable, accessible, convenient, efficient, safe, and secure, will boost India’s digital economy, improve financial inclusion, and make the monetary and payment systems more efficient.
The Digital Rupee would provide the public with widespread access to digital money that is free of credit and liquidity risk.
In the retail segment, the advantage of Digital Rupee is expected to emerge from the token-based variant. However, CBDC has the potential to jeopardise the country’s financial stability, monetary policy, financial market structure, and credit cost and availability.
RBI is also cautious that financial decentralisation can pose a risk for country’s financial and macroeconomic and hence it is testing the digital rupee in a phased manner.
Galactik Views