RBI should not rush the launch of India’s official digital rupee

Individuals’ access to central bank IOUs may not be a big problem in countries with well-capitalized financial systems. But this is a major advantage in India. As researcher Bhargavi Zaveri observes, depositors at 21 Indian lenders have been prevented from withdrawing their funds due to banking difficulties in recent years: “A CBDC…will mitigate the risk of losses Indian depositors face when dealing with commercial banks. “

Consumers may find electronic rupee as a safer alternative to bank deposits, which underpins ₹76 trillion real-time annual payments through apps such as Walmart’s PhonePe, Alphabet’s Google Pay and Paytm. But there is also the risk. If e-money becomes popular and RBI imposes no limits on the amount that can be stored in mobile wallets, weaker banks may find it difficult to keep low-cost deposits. And even if they lose that cushion, lenders may be reluctant to shed their loan assets and sacrifice profits. Their less liquid balance sheets could make them vulnerable to bank runs.

All economies are aware of this threat to financial stability. Yet advanced countries are also worried about the decline in the use of banknotes, especially after covid. As shopping moves online, the basis of trust in demand deposits, which they convert to cash at face value, can be reduced to a theoretical construct. An electronic currency could keep the notion of convertibility rooted in daily reality.

In India, however, there is no such urgency as the money is far from dying. Banknotes make up around 15% of the money supply, compared to 1% in Sweden. Still, the Riksbank is in no rush to adopt a CBDC. After five years of weighing options, the Swedish monetary authority has yet to make a final decision on whether or not to issue an electronic krona.

The US Fed is seeking public input on whether to offer a formal tender to compete with private stablecoins that rely on the dollar as the world’s most popular unit of account. A digital euro is under investigation for 24 months. If all goes well, the European Central Bank could offer it by 2025. Japan could postpone a call to 2026.

India’s rushed maturity appears to be at least partly a response to cryptocurrencies, though it’s hard to see how an e-rupee can wean the public off the get-rich-quick lure of a class. of speculative assets. Another reason to hurry may be a desire to leave China, which at the start of November had some 140 million people registered with its e-CNY. But China doesn’t have a national rollout date, and Alipay and WeChat Pay retain their grip on digital payments. Furthermore, Beijing’s intention to promote a dollar rival in cross-border trade and finance will only become clear after the appearance of the digital yuan in Hong Kong.

Any role for a digital rupee in India’s fast-growing online economy is unclear. Unlike perfectly anonymous cash, most CBDCs will be designed so that central banks can track spending. However, transactions made with them may not be visible to payment apps, and fintech companies may lose access to some mined data for cheap loans to those without collateral. As for earnings, [it could eliminate the need of an] costly network of correspondent banks for the settlement of cross-border payments. For Indians working abroad, sending money home will become easier and cheaper. This would mean savings for the world’s largest recipient of remittances, although it could be achieved even without a digital rupee, through a global network like the Nexus project proposed by the Bank for International Settlements.

A digital rupee might just be a bargain. On the one hand, it may not be a bad idea for the monetary authority to use technology to warn bank management that they need to stop taking depositors for granted. Yet that lesson is probably best administered after lenders put covid-related stress on their balance sheets behind them.

Also, RBI needs to do their homework. Technology, blockchain or otherwise, will have to balance the often conflicting goals of speed, scalability, auditability, security, and privacy, which the Fed is trying to achieve through its Project Hamilton. Given India’s still vast digital divide, a protocol for offline use needs to be developed. Rushing into implementation of what should ideally be a multi-year project can involve unnecessary risk.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services

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