The RBI’s digital currency will cut costs, facilitate swift transfer of money and aid the internationalisation of the rupee
BY KUMUD DAS
The Reserve Bank of India (RBI) has rolled out a pilot of its proposed digital rupee or Central Bank Digital Currency (CBDC), enlisting nine private and stateowned banks to conduct inter-bank transactions with this form of currency.
The digital rupee, also known as CBDC, is a digital form of the currency notes issued by a central bank. It is substantially no different from bank notes but, being digital, is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money.
RBI Governor Shaktikanta Das was right when he said that CBDC is going to bring about major transformation in the way business is done—the way transactions are conducted—and highlighted that the RBI is among the very few central banks in the world that have taken this initiative.
The pilot announcement involves nine banks, including State Bank of India, Bank of Baroda, HDFC Bank, Yes Bank, Kotak Mahindra Bank and ICICI Bank, and is being dubbed one of the most sought-after developments, since its announcement in the FY23 Union Budget.
As of now, the transactions are taking place between banks and for government securities only, that too by the Clearing Corporation of India Limited (CCIL) which is acting as an intermediary.
For India, the progress on cross-border payments using CBDCs signifies a milestone as big as the Unified Payments Interface (UPI).
Initially, the digital rupee (e`) will be used for issuing virtual currency for transactions in government securities. However, it will be used for cross-border transactions and even inward remittances in days to come. Once that happens, it will help the Indian diaspora in sending money back home in not only a hassle-free manner but also with a highly reduced commission. Moreover, they can send the money in a jiffy. As of now, Indians living abroad have to depend heavily on mechanisms like SWIFT. Again, because the mechanism is a US-based one and hence has to work under the influence of the US government, in today’s context when the Ukraine crisis is getting prolonged, it often makes it difficult for Non-Resident Indians (NRIs) to send money to India.
The concept of digital currency is a bit tricky to understand as it will not be traded like physical money. The money will be in virtual form just like other cryptocurrencies but the digital rupee will not be decentralised. It will be regulated by the RBI. The digital rupee will be completely legal and acceptable to the Indian government.
The launch is being carried out in two phases. Currently, this is the first pilot phase when the digital rupee has been launched for wholesale transactions i.e. for large transactions.
Apart from other objectives like beating the decentralised and unregulated cryptocurrencies, will the digital rupee make international payments easier? Will the digital rupee make it easy for NRIs to send money home or make rupee payments for buying homes or investing in India? Let us discuss these points one by one.
The digital rupee will be of great help to India in making rupee payments in international trade. For example, India has been working out a system to pay for Russian oil in rupees because of the US sanctions against Russia in the wake of the war in Ukraine. India has also been paying for Russian oil through the dirham (the UAE currency).
Once it becomes fully operational, the digital rupee is set to help the country sort out all such issues in one stroke. For example, as it works on blockchain technology, there is no scope of any transaction falling prey to menaces like cybercrime. Secondly, unlike cryptocurrencies, that are quite volatile, it is going to be a stable virtual currency and hence will provide huge relief to the Indian diaspora while carrying out any transactions with their near and dear ones living in India.
Cost-effective and efficient cross-border transactions will help in higher integration of the Indian economy in global trade and capital flows.
With over $85 billion in remittances by the Indian diaspora, CBDC would cut costs, facilitate swift transfer of money and aid the internationalisation of the rupee.
Ankit Wadhwa, CEO and co-founder, Rario, which claims to have sold three lakh NFTs (non-fungible tokens) as of now, says, “The digital rupee has simplified the banking eco-system. For starters, it is a verifiable money transfer.”
International transfer of money has been a painful job for the country’s exporters as it takes 24 to 72 hours for the entire transaction to complete. The global transfer of money has to pass through several phases, including sender bank, correspondent bank, receiver bank, Nostro & Vostro accounts, forex team and so on and you don’t know where your money is stuck in between. The digital rupee will make such transactions instantaneous.
“CBDC will further be a positive step towards the adoption of blockchain for financial services, and will align India with the world that is rapidly progressing towards adoption of digital currencies,” feels Sanjeev Chandak, CEO and co-founder of ftcah.
UPI processed 7.3 billion transactions, worth `12.11 trillion, a record high in terms of the value of transactions. On a year-on-year basis, the volume of transactions in October was up 73 percent, while the value of transactions was up 57 percent, says the latest data released by the National Payments Corporation of India (NPCI).
As of July 2022, 105 countries were in the process of exploring a CBDC, the RBI said in a report last month.
The Bahamas was the first of the 10 countries to launch their own CBDC. The primary motive behind the launch of the ‘Bahamian Sand Dollar’ in October 2020 was to cater better to its unbanked and under-banked citizens.
Seventeen other countries, including China and South Korea, are in the pilot stage and preparing for possible launches. China, which was the first large economy to pilot a CBDC in April 2020, aims for widespread domestic use of the digital yuan by 2023.
‘Cross Border Payments’ is an area particularly ripe for change and could benefit from new technologies. According to the World Bank, India is the world’s largest recipient of remittances, receiving $87 billion in 2021 with the United States being the biggest source, accounting for over 20 percent of these funds.
The cost of sending remittances to India, therefore, assumes critical relevance, especially in view of the large Indian diaspora spread across the world and from the point of view of the potential (mis)use of informal / illegal channels.
The G20 has also made enhancing cross-border payments a priority and endorsed a comprehensive programme to address the key challenges to cross-border payment, namely, high costs, low speed, limited access and insufficient transparency, and frictions that contributed to these challenges. Faster, cheaper, more transparent and more inclusive cross-border payment services would deliver widespread benefits for citizens and economies worldwide, supporting economic growth, international trade, global development and financial inclusion.
The Bureau of Indian Standards (BIS) has published the results of a survey of central banks in June 2021, which notes that CBDCs could ease current frictions in cross-border payments—particularly if central banks factor an international dimension into CBDC design from the outset.
(The writer is a Mumbai-based senior business journalist)
