RBI plans digital currency pilots soon

CBDC will help cut the cost of currency management while expediting real-time payments: Sankar

The Reserve Bank of India is likely to soon kick off pilot projects to assess the viability of using digital currency to make wholesale and retail payments to help calibrate its strategy for introducing a full-scale central bank digital currency (CBDC).

“Every idea has to wait for its time, perhaps the time for a CBDC is here,” RBI Deputy Governor T. Rabi Sankar said on Thursday. “Like other central banks, we have also been exploring the pros and cons of this since quite some time,” he added.

India is already a leader in digital payments, but cash remains dominant for small-value transactions, he said, stressing that an official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.

“Some key issues are being examined: whether they should be used in retail or wholesale payments, the underlying technology, if the validation mechanism should be token-based, etc. Conducting pilots in wholesale and retail segments may be a possibility in the near future,” he said.

A high-level inter-ministerial committee set up by the Finance Ministry had recommended the introduction of a CBDC with changes in the legal framework including the RBI Act, which currently empowers the RBI to regulate issuance of bank notes.

‘Save on paper currency’

“India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC — to the extent large cash usage can be replaced by CBDC, the cost of printing, transporting and storing paper currency can be substantially reduced,” Mr. Sankar said at a discussion hosted by Vidhi Center for Legal Policy.

“The advent of private virtual currencies is another reason… If these private currencies gain recognition, national currencies with limited convertibility are likely to come under some kind of threat,” he remarked.

Transacting with CBDC would be an instantaneous process as the need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another, Mr. Sankar pointed out. Moreover, foreign trade transactions could be speeded up between countries adopting a CBDC.

“They could enable a cheaper and more real-time globalization of payment systems — it is conceivable for an Indian exporter to be paid on a real-time basis without any intermediary…The risks of dollar-rupee transactions, the time zone difference in such transactions would virtually disappear,” he added.

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