6 Transformative Aspects of the Digital Rupee 

When it comes to banking and financial services (BFSI), one proposal in Budget 2022 with the most far-reaching impact is the watershed proposal to introduce the Digital Rupee. Various aspects of Central Bank Digital Currency (CBDC) are reasonably well-documented. At the same time, many transformative aspects of the Digital Rupee in the radically altering financial landscape, will only unravel over time. It’s certainly not too early to try and draw the broad contours of the coming transformation. Here are my thoughts on six important aspects.

The matter of acquisition The introduction of the Digital Rupee is likely to happen in phases and after pilot projects, possibly like the Digital Yuan in China. It may well take some years for it to effectively get implemented. An important question would be how easy will it be to acquire it. The key would be the details that would emerge from the RBI which would also influence the Digital Rupee’s adoption.  

Question of adoption Another question about the Digital Rupee would be how seamlessly Indians would be able to move from the physical to the Digital Rupee and vice-versa. While it is not practical, will there be any effective limitation of holding the Digital Rupee? If not, this is likely to have profound implications for banks. 

Issue of impact on banks For centuries, people parked money in banks as deposits. This was, in turn, lent by banks to business, trade, individuals, among others. Since Digital Rupee is going to be well, digital, safekeeping and its role as a credible store of value– which all currencies are supposed to be–will not be an issue. 

A significant amount of money being held in Digital Rupee, especially quantum of money if moving out of banks, will leave banks with lesser funds to lend. This could have an impact on their financial muscle besides their ability to carry out many of its fee-based activities that typically add to their profitability. In other words, can the Digital Rupee box up the size of Indian banks and their traditional role in finance? 

Monetary supervision Monetary authorities like the RBI, have monetary policies which typically operate though the levers of the banking system. If a significant amount of cash effectively lies outside the banking system, how does India’s money management evolve and adapt? And how does one get to ensure policy transmission for digital currency parked in non-banking financial companies (NBFCs) and in mobile apps of FinTech and digital finance companies?

Promise of financial inclusion  One popular argument put in favour of digital currency is that it is likely to foster greater financial inclusion. The question is how will the currently unbanked effectively get access to financial services? To put it another way, given the efforts already made towards financial inclusion, what new benefits will the Digital Rupee offer that will help the population excluded from banking and financial services to enter the fold? 

Question of privacy Would the government and other authorities be able to track the use of the Digital Rupee and if so, what would be the ticket size? My sense is that the greater the surveillance, the less popular it would be for those who regularly use cash such as those in the informal sector, many small businesses and trade, among others. Of course, it goes without saying that the security features of the Digital Rupee would need to be iron-clad since trust is the cornerstone of any currency.  

In the days to come, we will hear more and more about these and many other aspects of the Digital Rupee. The announcement of its introduction reminded me of Victor Hugo’s oft used quote: “Invasion of armies can be resisted, but not an idea whose time has come.”