INTRODUCTION
In August 2022, the Reserve Bank of India (RBI) announced that a digital rupee — a central bank digital currency — will be introduced in phases beginning with wholesale businesses in the 2022 to 2023 financial year. The India CBDC is being developed for both retail and wholesale use simultaneously. However, the Reserve Bank of India may roll out the digital currency for wholesale businesses first. There are four main motivations for issuing a CBDC in India, namely, (i) the Reserve Bank of India (RBI)’s desire to join other central banks that have issued a CBDC, (ii) the significant growth in digital transactions in India, (iii) the threat posed by private digital currencies, and (iii) the presence of a well-functioning and developed payment system in India. Prior to the announcement of a phased CBDC implementation in India, the Reserve Bank of India had repeatedly opposed private digital currencies. It is widely believed that the emergence of private digital currencies, especially bitcoin, inspired the Reserve Bank of India to begin plans to launch a CBDC digital Rupee. The Reserve Bank of India also proposed amendments to the Reserve Bank of India Act of 1934 which would enable it to launch a digital rupee CBDC. The government also plans to prohibit all private digital currencies in India with certain exceptions.
Correlation between interest in ‘CBDC’ and ‘cryptocurrency’ as search terms on the Internet.
The Pearson correlation analysis reports a 0.59 correlation between local interest in internet information about ‘cryptocurrency’ and ‘CBDC’. The correlation is positive and significant at the 1 percent level. This indicates that there is a significant positive correlation between interest in internet search for information about ‘cryptocurrency’ and ‘CBDC’ in India. This implies that Indian people who were interested in ‘cryptocurrency’ information were also interested in ‘CBDC’ information.
Regional interest in ‘central bank digital currency’ as a search term by internet users in India
Figure 1 shows the regional distribution of interest in internet information about ‘central bank digital currency’ in India. Figure 1 shows that interest in internet information about ‘central bank digital currency’ was very high in Delhi followed by Karnataka, Kerala, Uttar Pradesh, Tamil Nadu and Maharashtra. Interest in online information about ‘central bank digital currency’ exceeded the 50-point mark in each of these regions in India. In contrast, interest in internet information about ‘central bank digital currency’ was much lower in West Bengal, Telangana and Gujarat. Interest in online information about ‘central bank digital currency’ was below the 50-point mark in each of the three regions in India.
Benefits on India digital Rupee CBDC
The introduction of a central bank digital currency (CBDC) in India offers some benefits.
They include:
Cheaper currency management system– The India CBDC will reduce the burden of handling cash, printing cash and the logistics of cash management in India. It will help to reduce dependence on cash and lead to higher seigniorage due to lower transaction costs.
Eliminate payment risk– The India CBDC will eliminate payment risk through reduced settlement risk, efficient payments, trusted payment option, reducing time and cost of cross-border transactions.
Boost the digital economy– The introduction of a central bank digital currency in India will give a big boost to the digital economy in India especially when the India CBDC is launched in partnership with Fintech providers.
Increase financial inclusion– By making people use CBDC, India can bring more unbanked adults into the formal financial system.
Curbing illegal financial activities– The India CBDC can help to implement anti-money laundering (AML) and combating financial terrorism (CFT) measures by acting as a highly secure way for cross-border transactions.
Challenges and Considerations
User adoption: Adoption of electronic technology is important. This should increase public confidence and awareness of the benefits of digital currency.
Integration with existing systems: Seamless integration with existing financial systems and payment infrastructure is essential to work well.
Assessment: Regulatory frameworks are needed to address issues such as anti-money laundering (AML) and combating the financing of terrorism (CFT) in the CBDC context.
Privacy Concerns: Privacy issues surrounding e-use must be carefully considered to ensure people can use it safely.
Conclusion
The RBI's exploration of a CBDC program, embodied by the CBDC pilot, stems from a desire to harness the potential of digital currency while mitigating the risks associated with private cryptocurrencies. Analyzing the data and the reports introducing the CBDC Pilot programme is a right decision. The pilot program serves as a crucial testing ground for the CBDC. By evaluating user adoption, integration with existing infrastructure, and addressing regulatory concerns, the RBI aims to pave the way for a secure, efficient, and inclusive digital currency system for India's future.
Arnav Sachdeva is a Junior Analyst at IFSA Hansraj
References
IDFC First Bank on Central Bank Digital Currency (CBDC) https://www.idfcfirstbank.com/cbdc
HDFC Bank on CBDC-RBI's Central Bank Digital Currency Features & Benefits https://www.hdfcbank.com/personal/useful-links/quick-links
Correlation between interest in ‘CBDC’ and ‘cryptocurrency’ as search terms on the Internet.
Local interest in internet information about ‘central bank digital currency https://www.google.com/urlsa=i&url=https%3A%2F%2Fwww.researchgate.net%2Ffigure%2FLocal-interest-in-internet-information-about-central-bank-digital-currency_fig1_365182088&psig=AOvVaw3YuT45nh4c5bxh-OCTYeVv&ust=1709751092294000&source=images&cd=vfe&opi=89978449&ved=0CBUQjhxqFwoTCKjx66bl3YQDFQAAAAAdAAAAABAE
Reserve Bank of India (RBI) Press Release on CBDC pilot launch https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57277#:~:text=It%20is%20now%20proposed%20to,poor%20or%20limited%20internet%20connectivity
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