Digital Rupee: How CBDC Can Help India Reduce Costs, Improve Financial Inclusion
Within just a month of the launch of the Digital Rupee, nearly 16,000 users made payments worth Rs 64 lakh in a total of 160,000 transactions.
Late last year, India joined other nations such as Australia, China, and the US in announcing pilots for its very own central bank digital currency (CBDC), dubbed ‘Digital Rupee’ and denoted by e₹. For those unaware, CBDCs are a digital version of a country's fiat currency, issued and backed by the central bank, the Reserve Bank of India (RBI) in this case. A CBDC can be used to make electronic payments, just like traditional fiat currency can be used to make physical payments.
In May this year, the RBI announced that it is expanding the scope of the CBDC pilot in order to include more banks and locations. The pilot was initially launched in Mumbai, New Delhi, Bengaluru and Bhubaneswar, among participating customers and merchants in a closed user group (CUG). Other cities, including Ahmedabad, Chandigarh, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla are being added to the pilot in phases, the RBI said.
While the CBDC pilot began with four banks — State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank — four more banks were added subsequently: Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank. The RBI added that five more banks are in the process of joining the pilot, namely, Punjab National Bank, Canara Bank, Federal Bank, Axis Bank, and IndusInd Bank.
Why Is India Keen On Making CBDCs Work?
Now, an argument could be made that while India has announced strict taxations and KYC norms on crypto gains and crypto trading platforms, why is the Centre so keen on having its own CBDC? The simple reason could be that while CBDC might exist on a blockchain just like cryptos, it is not really a cryptocurrency. The most notable difference between the two is the volatility in prices. A cryptocurrency, like Bitcoin (BTC) for instance, can see a change in price every second, seeing a massive hike today and then crashing hard tomorrow, making it a go-to choice for investors who don’t mind the high risk for a greater return.
A CBDC, on the other hand, has the same value as the fiat rupee, and will continue to do so, making it considerably more stable and suitable for day-to-day transactions.
One of the primary driving factors behind the implementation of the Digital Rupee is to enable a more cost-effective seamless integration of cross-border payments in real time. “CBDCs can potentially improve financial inclusion by granting access to digital financial services for the unbanked and underbanked populations. Moreover, CBDCs can enhance efficiency and accessibility through faster settlements and cost-effective cross-border transactions,” Mudrex founder and CEO Edul Patel told ABP Live.
“Considering the growing popularity of digital payments among consumers, the transition to CBDCs may be smoother, especially for those who prefer digital payment methods or face limitations in accessing traditional banking services. To ensure widespread adoption, seamless integration with existing payment systems and user-friendly interfaces are crucial for consumers to embrace CBDCs effectively,” Patel added.
Additionally, and perhaps more importantly, CBDCs can also significantly reduce the total expenditure of printing money. And that’s a lump sum amount to be considered. In the period between April 1, 2021, and March 31, 2022, a total of Rs 4,984.80 crore was spent on security printing, as reported by Business Today. And this amount is borne by the RBI, banks, businesses, and the public.
Apart from the printing of notes, CBDC can also help in recruiting operational costs which include storage and transportation as well.
It can also help eliminate the presence of banks as the middlemen in transactions. “If you want to buy groceries from your neighbourhood kirana store, you can pay using your UPI-enabled app. What happens is that Google Pay, PhonePe, or Paytm beam all of these transactions on UPI. When you conduct a transaction, funds get transferred from your bank account to the kirana owner's bank account, i.e., two banks are involved. CBDC, like a cash transaction, is a one-on-one transaction. Money moves from your CBDC wallet to the kirana owner's wallet — there's no bank required,” WazirX Vice President Rajagopal Menon told ABP Live.
Future Of CBDC In India
Within just a month of the launch of the Digital Rupee, nearly 16,000 users made payments worth Rs 64 lakh in a total of 160,000 transactions.
“In India, the future of CBDCs looks promising. However, it might take some time for widespread adoption among the population,” Patel said. “Building public acceptance and trust is crucial for the success of CBDCs. Educating people about digital currencies' benefits and safety measures while addressing privacy and security concerns will be essential to instil confidence.”
The Mudrex CEO added that establishing the necessary digital infrastructure across the county is “imperative”. “This includes ensuring reliable internet connectivity, robust digital payment systems, and user-friendly interfaces.”
Sathvik Vishwanath, CEO, Unocoin, said, “The future of CBDC in India has potential, but success will depend on factors such as adoption rates, regulatory frameworks, infrastructure development, and collaboration with the private sector.”
WazirX’s Menon added, “Whether CBDC will take off in India would depend on various factors, including its acceptance by consumers, the regulatory framework supporting its implementation, the infrastructure for digital transactions, and addressing any concerns related to privacy and security.”
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.
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