India’s government has presented a timeline for the launch of a central bank digital currency (CBDC) – one of the most significant commitments to date, given the size of the country, to state-backed digital money globally.
During her presentation of the budget for the 2022-2023 fiscal year, finance minister Nirmala Sitharaman announced plans for the issuance of a ‘digital rupee’ by the Reserve Bank of India (RBI). “Introduction of CBDC will give a big boost to the digital economy,” Sitharaman said in her speech to parliament.
“Digital currency will also lead to a more efficient and cheaper currency management system,” Sitharaman said on 1 February. The digital rupee would, she said, be introduced “using blockchain and other technologies” while providing no further insight on potential underlying technology or distribution architecture choices. She did, however, indicate that the central bank would introduce the currency before the end of March 2023 by stating that it would be issued during the fiscal year 2022-2023.
If the digital rupee was indeed debuted by this date, it would make India the world’s second most populous country to introduce a CBDC. China, the world’s most populous nation, is well progressed with live trials of its digital currency, known as the e-CNY or ‘digital yuan’, but other major nations such as the US and UK are yet to commit to state-backed digital money. The Bahamas introduced the world’s first fully deployed digital version of a fiat currency – the ‘Sand Dollar’ – almost 18 months ago.
India previously ‘sceptical’ on CBDC
India displayed a cautious interest in potentially issuing a CBDC one year ago and has to date taken a relatively low profile in international CBDC discussions.
As part of a ‘Booklet on Payment Systems’ published in January 2021, the RBI said that it was exploring the possibility as to whether there is a need for a digital version of fiat currency and, if so, how to operationalise it. ‘Private digital currencies / virtual currencies / cryptocurrencies have gained popularity in recent years,’ the document stated. ‘In India, the regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks.’
“Perhaps the time for CBDCs is nigh,” one of the RBI’s deputy governors then said during a webinar last July. Delivering a keynote address, T Rabi Sankar said that “conducting pilots in wholesale and retail segments may be a possibility in near future”.
Wholesale CBDCs are for inter-bank use, while retail CBDCs (also known as general purpose CBDCs) would be available to the general population. The latter are a ‘more far-reaching’ innovation, according to the Bank for International Settlements. The RBI was “currently working towards a phased implementation strategy and examining use cases that could be implemented with little or no disruption,” Sankar said last summer.
‘Safe, robust and convenient alternative to cash’
The RBI issued the 2020-2021 iteration of its annual report ‘Trend and Progress of Banking in India’ by the end of last year and argued that ‘in its basic form, a CBDC provides a safe, robust, and convenient alternative to physical cash’. The authors explain that such a currency could also ‘assume the complex form of a financial instrument’ – depending on various design choices.
Questions about design, such as whether the CBDC would be for retail or wholesale use, would ‘need to be navigated before its introduction’, the 248-page report said. ‘Furthermore, in a country like India, the decision about distribution architecture, i.e., whether CBDC would be issued directly by the central bank or through commercial banks, needs to be carefully weighed.’
The RBI’s recommendation is to ‘adopt basic models initially, and test comprehensively so that they have minimal impact on monetary policy and the banking system’. While the report raises concerns over the ‘dynamic impact’ of a CBDC on macroeconomic policy-making, the authors are confident that ‘India’s progress in payment systems will provide a useful backbone to make a state-of-the art CBDC available to its citizens and financial institutions’.
RBI sets up fintech department
In a nod to fintech’s increasing importance, India’s central bank has created a fully-fledged fintech department.
The RBI has had a fintech unit, which subsequently became a division, since 2018. But a department has now been created ‘to give further focus to the area and facilitate innovation in the fintech sector in keeping pace with the dynamically changing financial landscape’, according to recent media reports citing an internal RBI circular.
Ajay Kumar Choudhary was appointed as new executive director to head the department, the central bank itself announced in a press statement. Choudhary, who will also oversee the risk monitoring and inspection departments, has previously held roles in RBI departments such as supervision, regulation and currency management. Until December 2021 he was chief general manager responsible for the supervision of all RBI entities. Between 2018 and 2019 he had a one-year stint at Bank of Mauritius.
The aim of the fintech department is to ‘not only promote innovation in the sector, but also identify the challenges and opportunities associated with it and address them in a timely manner’, the circular said. The department will sit within the RBI’s centralised administration division.
The fintech department is also supposed to provide a framework for further research in order to aid central bank policy interventions. ‘All matters related to the facilitation of constructive innovations and incubations in the fintech sector, which may have wider implications for the financial sector/markets and falling under the purview of the bank, will be dealt with the fintech department,’ the circular noted.
‘CBDC pilots in India possible in “near future”’ – our news story (9 August 2021) on T Rabi Sankar saying that “perhaps the time for CBDCs is nigh”
‘“Sceptical” India investigates central bank digital currency’ – our news story (1 February 2021) on the RBI researching how an Indian CBDC could work