India’s central bank digital currency (CBDC) may struggle for relevance, given the deep reach and use of the country’s digital payments systems, Capital Economics has said.
“Any CBDC brings risks and opportunities. But for many, a key challenge could turn out to be indifference among consumers,” Shilan Shah, Senior India Economist at Capital Economics said in a note on September 21.
“While the benefits for a central bank are clear, it is not obvious what advantages they offer to consumers in countries that already have efficient mobile payments systems. India is a good example.”
India’s mobile payment system already facilitates low-cost, real-time payment and supports broad inter-operability between different providers, the economist said.
A new e-rupee mobile wallet would offer little advantage to existing mobile users, whose numbers have soared over the past two years, he added.
India is aiming to launch its own central bank digital currency in this financial year that ends March 31, 2023.
The battle for crypto
Globally, more than 100 countries, including over a dozen G20 nations, are exploring CBDCs following the quick adoption of several private crypto assets.
The Reserve Bank of India (RBI) warned investors repeatedly about private cryptocurrencies and highlighted the financial stability risks from such assets.
Central bank digital currencies could "kill" the reasons for the existence of private cryptocurrencies, RBI Deputy Governor T Rabi Sankar had said in early June.
India started taxing profits in so-called private cryptocurrencies and digital assets from this financial year.
The RBI is working towards a phased implementation of the digital currency in both wholesale and retail segments, Governor Shaktikanta Das said on September 20.
It has asked four public-sector banks to trial the CBDC, as reported by Moneycontrol.
The central bank has also recommended that the government frame regulations for cryptocurrencies and prohibit them.
The government, however, seems to be of the view that global collaboration is needed for any effective regulation or a ban, Finance Minister Nirmala Sitharaman has said.
The borderless nature of cryptocurrencies necessitates international collaboration to prevent regulatory arbitrage, the minister said.
The government is working on a much-awaited crypto consultation paper.
India’s digital payments systems are recognised globally and several countries are looking to adopt its unified payments interface, or UPI, while facilitates interbank transfers through third party applications.
The country’s digital payments sector received a fillip during the coronavirus pandemic as transactions surged.
The period from March 2020 to August 2022 has seen a massive growth of 427 percent in UPI transactions, which reached a new high of 657 crore transactions in August 2022, according to the RBI governor.
Conservative central banks
Capital Economics, in its CBDC primer, says that central banks do not have a revolution in mind when it comes to the introduction of digital currencies.
The “do no harm” approach of central banks implies that the first generation of CBDCs will not have any major implications for monetary or fiscal policy. These digital currencies will not replace physical cash, according to Capital Economics.
It is also likely that CBDCs will have some sort of ceiling on deposits or transactions to lower the risk that they cause deposits to drain from banks.
“However, this cautious approach also means that consumers are likely to see no advantages in using CBDCs over the privately-issued digital wallets most already have the ability to put on their phones,” the house said.
The contours of India’s central bank digital currency have yet to be made public.
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