Since the Indian Finance Minister Nirmala Sitharaman announced that the country is set to launch the digital avatar of the Indian rupee in the recently announced Union Budget, there have been many speculations and anticipations around the same. The primary purpose of the digital rupee, i.e. Central Bank Digital Currency (CBDC) is to strengthen the digital payment ecosystem in India while bringing transparency in the payment system and empowering the citizens to leverage the digital wallet for payments. Although the aim seems achievable, there are several risks associated with it as well.
Before rushing into the pros and cons, let us first see what exactly is a digital rupee?
By definition, a digital rupee is the digital version of a fiat currency. It is an online token that has no physical presence and is widely hailed as the perfect alternative to cash in the long run. Given the rapid surge of cryptocurrencies and the increasing popularity of blockchain technology, the appeal towards digital currencies like the digital rupee is also increasing.
What will a Digital Rupee bring to the Table?
The biggest advantage of using a digital rupee is accelerated financial inclusion. With the use of a common digital currency, a large part of the population will come under formal economy and tax net. As a majority of transactions in India are still carried out by untraceable cash, this might be a good option to ensure transparency and therefore reduce frauds and money laundering risks. Furthermore, the cost of financial transactions will be reduced with the digital rupee. This might prove extremely beneficial for cross-border transactions as they are usually costly. Moreover, it will also save the costs of printing, storing, and distributing cash.
However, this is just one side of the coin. On the flip side, there are several possibilities that may be alarming.
Risks Associated with the Digital Rupee
If the digital rupee becomes a big hit and there are no limits on the amount that can be stored in the mobile wallets, some of the weaker banks may struggle to retain the low-cash deposits. If these banks lose those deposits as well, lenders may become more skeptical about shedding their loan assets and sacrificing profits. Moreover, as banks are required to keep a higher level of liquidity, it will result in fewer profits and reduced lending capacity for commercial banks. There is also a question of whether the digital rupee will offer the same level of anonymity like cash. As a majority of transactions will go online, the risk of cybersecurity breaches will also increase.
Is the Hustle Required?
According to statistics, cash accounts for around 15% of India’s money supply. This is much more than some of the countries like Sweden and the U.S. that are still skeptical about the use of CBDCs. Thus, the plan to introduce the digital rupee within a year or two seems hasty. Several economists have also expressed their concerns about the impact of the digital rupee at the retail level. Considering all the probable pros and cons with a balanced approach, the Indian government and the Reserve Bank of India should incorporate a robust implementation strategy if the digital rupee has to become a hit.
Also Read: A Complete Guide To Cashless Economy