What is Digital Rupee? And How Will It Work?

WHAT IS CBCD?

CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.

DOES CBDC AFFECT BANKS?

Yes, they could cause dislocations depending on the design of the CBDC. It could reduce transaction demand for bank deposits, but they reduce settlement risks. Being risk-free, CBDC can lead to a shift away from bank deposits, cutting government guarantees on deposits. If banks lose deposits, their ability to create credit will be constrained because central banks cannot provide credit to the sector.

IS IT BETTER THAN OTHER FORMS OF DIGITAL PAYMENTS?

Yes, imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over- the need for interbank settlement disappears. It would also enable more real- time and cost- effective globalization of payment systems. It is conceivable for an Indian importer to pay an American exporter on a real- time basis in digital dollars, without the need of an intermediary.

WHY DO WE NEED CBDC?

With the during usage paper currency, there is a need to popularize electronic forms of currency. This becomes efficient in high physical cash usage economies like India and Germany. Also, this will be a substitute for private digital currencies

HOW WILL CBDC CHANGE MONETARY POLICY?

Historically, monetarists targeted the supply of broad money through bond purchases, sale and purchase of currencies and tinkering with the reserve ratios of banks. But the demand for money became unstable when finance got globalized at the beginning of the 90s. This forced central banks to target interest rates. Now with CBDCs they could assess demand for money and get a better handle on their policies.

WHAT IS RBI PLANNING?

The RBI has been examining use cases and working out a phased implementation strategy for the introduction of CBDC with little or no disruption. As per the central bank, crucial elements around the design and usage of a CBDC need to be navigated before its introduction. The central bank is working out models on retail and wholesale use of the CBDC.

WHEN IS THE LAUNCH?

Even if the RBI is ready, it may not be possible before the crypto law is passed in Parliament. It would also require amendments to the RBI Act, the Coinage Act, the FEMA, and the Information Technology Act since existing legal provision were created with paper currency in mind.

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