The Digital Rupee — Is India ready for the next wave of digital payments?

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Shehnaz Ahmed and Krittika Chavaly

The debate on central bank digital currencies (CBDCs) is heating up. The reference to a ‘digital dollar’ in an early draft of a United States legislation for the $2 trillion financial stimulus package announced to fight the impact of COVID-19, and reports of China’s impeding deployment of the world’s first digitised currency, the digital yuan, has propelled this debate.

A CBDC is a new form of money issued by the central bank that is intended to serve as legal tender. In theory, a CBDC could be used either for retail (low-value, high volume) or wholesale (high-value, low volume) transactions. Currently, only a limited number of financial institutions (such as commercial banks) can hold and transact in electronic central bank-issued money or reserve balances.

A retail CBDC can expand this access to regular businesses and individuals, allowing them to make everyday payments in a digital equivalent of physical cash, held either as tokens or in an account.

Arguably, the CBDCs appear to present solutions to several policy challenges, such as direct cash transfers and physical cash transactions. For instance, instead of transferring cash to bank accounts or delivering physical cash to the distressed, the CBDCs may facilitate such transfers digitally without requiring beneficiaries to hold bank accounts. Moreover, given the nature of the ongoing pandemic and worldwide calls for the greater use of digital payments, the CBDC research that is underway might receive an additional boost in several jurisdictions.

In India’s case, this might present an opportune moment to understand whether a CBDC is an instrument worth adding to the policymaker’s toolkit.

Global research and experimentation on CBDCs pre-dates the current crisis.

Sweden has been studying CBDCs as a government-backed alternative to private digital payment methods given the steep decline in the use of cash. In Uruguay, the CBDCs have been tested as part of a wider financial inclusion drive. A 2019 study by the Bank for International Settlements (BIS) revealed that central banks representing a fifth of the world’s population have said they are likely to issue the first CBDCs in the next few years.

In the last couple of months, France and South Korea have specifically launched experimentations to test use cases of their CBDC projects. China has also confirmed that it has rolled out a pilot of its digital currency in four of its cities. While it is difficult to confirm if the announcements were triggered by the ongoing crisis, the BIS recently noted that the pandemic may heighten calls for a CBDC.

During the first wave of policy responses to COVID-19, the Indian government encouraged the use of digital payment methods to limit contact between individuals and quell virus transmission. Although the Indian digital payments infrastructure is robust, it does not appear that a CBDC is on the anvil. Indeed, a CBDC could support and further India’s vision of building a resilient, innovative, and competitive payments landscape. It may help meet future demand for digital payment methods, given the ‘less-cash’ India goal that has been actively pursued by the government.

A CBDC could also become a building block for designing a better cross-border payments framework. Acknowledging the potential of a CBDC in cross-border payments, the Hong Kong Monetary Authority (HKMA) noted that a CBDC could facilitate real-time cross border transactions by potentially eliminating the need to go through layers of correspondent banks, which would likely increase efficiency and lower the overall transaction cost.

Nevertheless, each of the aforesaid opportunities come with challenges that require careful consideration. A CBDC could raise obstacles from a monetary and financial stability perspective — for instance, if a significant amount of deposits are moved from commercial banks into a CBDC, it could have implications for the balance sheets of commercial banks. There are also apprehensions concerning anonymity, given that the digital nature of the currency will entail increased monitoring of transactions.

Going forward, it is critical for India to build an accessible, inclusive and resilient payment system that can withstand sustained shocks in the aftermath of this crisis. The Reserve Bank of India (RBI) has a large toolkit of technology and policy instruments it can use to towards furthering post-pandemic priorities, of which a CBDC might well play a part. India must, therefore, seriously consider accelerating the discourse on a possible ‘Digital Rupee’ to balance these policy priorities.

Shehnaz Ahmed is senior Resident Fellow and Krittika Chavaly is Project Fellow at the Vidhi Centre for Legal Policy. Views are personal.