A Digital Rupee for India – The Way Forward
Reserve Bank of India plans a "phased implementation" of a digital currency
The Vidhi Centre for Legal Policy organised an online discussion on “Central Bank Digital Currencies – Is this the Future of Money?” on 22 July based on its working paper on “A Central Bank Digital Currency for India – Proceeding with Cautious Optimism”. In his Keynote Address, T Rabi Sankar, the Deputy Governor, Reserve Bank of India said that “RBI is currently working towards a phased implementation strategy and examining use cases [for a central bank digital currency (CBDC)] which could be implemented with little or no disruption” to the banking sector and monetary policy. He added that “conducting [CBDC] pilots in the wholesale and retail segments may be a possibility in near future.”
While explaining the possible opportunities presented by CBDC, he noted that the “introduction of CBDC has the potential to provide significant benefits, such as reduced dependence on cash, higher seigniorage and reduced settlement risks.” He added that CBDC issuance “would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.” He also highlighted the potential risks that come with a retail CBDC issuance, especially its implications on the disintermediation of the banking sector and the technological risks. However, he noted that these risks will need to be carefully weighed against potential benefits of CBDC.
He further clarified that CBDC is not comparable to highly volatile private virtual currencies as such currencies do not have an issuer and they do not represent anyone’s liability. Therefore, private virtual currencies “are not money and certainly not a currency.”
In his concluding remarks, he stated that “it would be RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems.”
The Keynote Address was followed by an engaging panel discussion with Saugata Bhattacharya, Executive Vice President and Chief Economist at Axis Bank and Ashraf Khan, Senior Financial Sector Expert, International Monetary Fund that was moderated by Shehnaz Ahmed, Senior Resident Fellow and Fintech Lead at the Vidhi Centre for Legal Policy.
While discussing Vidhi’s working paper, Shehnaz Ahmed emphasised on the need to have a strong legal and governance framework for CBDC issuance. She highlighted that by tracing CBDC developments across 43 countries, Vidhi’s working paper identifies preliminary consideration and examines the legal foundations for issuance of a digital rupee in India.
Speaking on the right approach for central banks to introduce CBDCs, Ashraf Khan observed that “CBDC is a tool to achieve policy objectives such as faster cross-border payment system and promoting financial inclusion”. He stressed that it is important for central banks to identify the policy objective they need to achieve and design a CBDC. He added that “since there is no one policy objective, there is no one approach to issue a CBDC.”
In response to Shehnaz Ahmed’s question on what will be the incentive for retail users for using CBDC in India, Saugata Bhattacharya stressed that the interplay between access to credit and CBDC could be a significant incentive for the entire market to adopt CBDC as access to credit is a huge constraint for small businesses. He added that one of the biggest incentives for CBDC adoption could be its possible impact on the “reduction of cost of intermediation which can then translate into lower cost of credit.” “Once the credit ecosystem begins to adopt CBDC, it will transfer over to the retail payments sector”, he added.
Read Vidhi’s working paper on CBDCs here.
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About the Authors
Shehnaz is Senior Resident Fellow and Lead, Fintech and ALTR. She works on emerging areas of policy and law on the intersection of finance, technology, and inclusion. At Vidhi, she has worked with several Ministries of the Government of India on matters relating to digital payments, financial regulation, commercial laws and business and human rights. Her independent research at Vidhi focuses on leveraging technological solutions to build a robust and inclusive financial system for all in India. Prior to joining Vidhi, she worked as an associate at the Financial Regulatory Practice at Cyril Amarchand Mangaldas, Mumbai where her work focused on advising leading financial institutions (both Indian and multinational), including payment systems on legal and regulatory issues in India. She has also involved in several mergers and acquisitions in the financial space. She has also worked as an associate at the Dispute Resolution team at JSA, New Delhi. She writes frequently for the Oxford Business Law Blog and media outlets such as Hindu BusinessLine,Financial Express, MoneyControl, FirstPost, etc. She graduated from RML National Law University in 2011.
