Digital Rupee in India

The hot debate just after the announcement of the Union Budget 2022-23 is on the roll-out of the? 'Central Bank Digital Currency’ and the introduction of the digital rupee.?

A form of financial protocol termed as 'Central Bank Digital Currency, the CBDCs expected to be a game-changer for the nation’s digital payment's ecosystem.?

While some believe that digital money in India will provide a strong impetus to the fintech landscape, others think it is a decision that should be taken after much thought.?

What prompted the government to announce this decision?

CBDCs will be an excellent alternative to the private virtual currencies entering the Indian currency market, apart from driving the economy successfully towards a digital future.?

Earlier, the nation was getting ready to put a stopper to the rising cryptocurrency trade as it could pose serious concerns to macroeconomic and financial stability. Not just that, cryptocurrency trade would also make way for money laundering, fraud, and terror financing.

With the introduction of the Digital Rupee, the government will have a wholly regulated digital money system. The regulation of the digital rupee, upon its rollout, will be supervised by the Reserve Bank of India (RBI).

Benefits of introducing Digital Rupee

One of the primary reasons for introducing the digital rupee money is to boost the digital economy, reduce the usage of currency notes, and ultimately reduce the rising cost of printing currency notes.

The demand for currency notes will rise to meet the transactional needs as the country's GDP increases from $3 trillion to $5 trillion and the per capita consumption levels go up. The introduction of digital currency will hence effectively reduce this rising cost.??

Also, despite the soaring digital transactions, there is still a wide gap between the number of active users of digital payments (hardly 200 million versus the potential of 700 million). Thus, according to finance minister Nirmala Sitharaman, an electronic representation of India's legal tender will boost its digital economy. In addition, this move will also put India at the forefront of innovation.??

What makes Digital Indian Rupee risky?

A digital rupee will be like banknotes, without ATMs. This e-cash will enable its users to transfer purchasing power from bank accounts into phone wallets as online tokens, which like physical cash, will be a liability of the Reserve Bank of India.

However, there are concerns that if e-currency in India gains popularity without any limit on the amount to be stored in digital wallets, weaker banks may struggle to retain low-cost deposits.?

Also, lenders may not want to shed their loan assets and sacrifice profits. Their less-liquid balance sheets could leave them vulnerable to bank runs. This could threaten financial stability, which most economies are unwilling to invite.?

Another significant risk to this decision is the rising cyber fraud in the country. Also, the government will have to plan efficiently to ensure wide-scale implementation of speedy internet connectivity and the technology to ensure speed, scalability, security, and privacy.?

What is digital currency in India but another attempt to drive the nation towards a digitally empowered future? However, rushing to implement such a major decision can bring unnecessary risks.