Sovereign guarantee strengthens the intrinsic value of India’s digital rupee

With an aim to reduce demand for physical currency notes and thereby curb the ongoing depreciation in the rupee, the Reserve Bank of India (RBI) launched Central Bank Digital Currency (CBDC) – Wholesale for the select wholesale segment consumers and merchants. The CBDC is popularly known as the electronic rupee (e₹-W) or digital currency.

Launched initially on a pilot project, the digital currency for retail (e₹-R) will be launched on a pilot basis in a month. Presently, the e₹-W is made available for inter-bank transfer of funds for the select bulk customers, the e₹-R will be available in select locations in closed user groups comprising customers and merchants.

Following the 2022 Union Budget announcement this year, the RBI on October 7 announced the commencement of digital rupee (e₹) for specific cases on a pilot basis. With this, the e₹-W is likely to make the interbank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. Going forward, other wholesale transactions and cross-border payments will be the focus of future pilots, based on the learnings from this pilot.

“It was indeed a landmark moment in the history of currency in India. Going forward, it will be a landmark achievement so far as the functioning of the entire economy is concerned. We will try and launch the CBDC in a full-fledged manner in the near future,” said RBI Governor Shaktikanta Das, and added, “This is something we have to proceed with very carefully. This is for the first time the world is doing it. We don’t want to be in a great hurry, we want to learn from the experience.”

What is e₹-W?
CBDC or e₹-R is a digital form of currency notes issued by the RBI. Encouraged by the success of cryptocurrency globally and online payment systems in India, the Finance Ministry in consultation with the RBI decided to launch a modern-age contactless payment system that reduces human intervention and also transaction costs. With this, the e₹-W was coined to introduce in India to execute inter-bank fund trans-hassle-free. Initially, the system is launched on a pilot basis for select customers which, on a successful trial run, will be made available for other users and merchants.

The RBI has, in the beginning, identified nine banks viz State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC for participation in the pilot which may be later expanded to other public and private sector, and cooperative banks. Also, the RBI may allow financial institutions and non-banking finance companies (NBFCs) to use e₹-W as their payment made.

The evolution of e₹-W
The form and functions of money have changed over time with the developments in the economy and the evolution of the payments system, and it will continue to influence the future course of currency. The concept of money has experienced an evolution from Commodity to Metallic Currency to Paper Currency and now to Digital Currency.

The changing features of money are defining the new financial landscape of the economy. Further, with the advent of cutting-edge technologies, the digitization of money is the next milestone in monetary history. Advancement in technology has made it possible for the development of a new form of money viz, CBDC or e₹-W.

Recent innovations in technology-based payments and solutions have led central banks around the world to explore the potential benefits and risks of issuing a CBDC so as to maintain the continuum with the current trend in innovations. RBI has also been exploring the pros and cons of the introduction of CBDCs for some time and is currently engaged in working towards a phased implementation strategy, going step-by-step through various stages in pilots followed by the final launch, and simultaneously examining use cases for the issuance of its own digital rupee, with minimal or no disruption to the financial system.

Difference between cryptocurrency and CBDC
CBDC is a centralized currency controlled and monitored by India’s central bank. Global central banks are working on strategies to launch a full-proof electronic currency to minimize the use of actual currency notes. India has taken the lead in the process.

The RBI broadly defines CBDC as the legal tender issued by the central bank in a digital form. It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency, and shall be accepted as a medium of payment, legal tender, and a safe store of value. CBDCs would appear as a liability on a central bank’s balance sheet.

By contrast, cryptocurrency is a decentralized digital asset and a medium of exchange based on blockchain technology. However, it has primarily been controversial due to its decentralized nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities.

The digital rupee will be different from Bitcoin, Ethereum, and other cryptocurrencies in the sense it will be backed by the government. In terms of intrinsic value, the digital rupee will be equivalent to holding a physical rupee equivalent.

Conclusion
The Indian rupee has depreciated by 10 percent so far this year, hitting a low of 83.29 against the US dollar on October 20. The rupee has been depreciating against the dollar for the last several years. In 2021, the rupee declined by 1.5 percent after falling by over 2 percent in 2020 and 2019. The Indian currency slumped by a staggering 8.6 percent in 2018. The digital rupee is expected to reduce demand for physical currency notes which would be visible as and when launched for retail customers and merchants.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com