What is the Central Bank Digital Rupee? Examine the need for its adoption and its impact on stakeholders
The term central bank digital currency (CBDC) refers to the virtual form of a fiat currency. A CBDC is an electronic record or digital token of a country’s official currency. As such, it is issued and regulated by the nation’s monetary authority or central bank. As such, they are backed by the full faith and credit of the issuing government. CBDCs can simplify the implementation of monetary and fiscal policy and promote financial inclusion in an economy by bringing the unbanked into the financial system.The Reserve Bank of India (RBI) is developing a phased implementation approach for its own digital currency, which it plans to debut in the wholesale and retail markets soon.
What is a Digital Rupee
- Economically, the digital rupee is similar to rupee coins and notes. It is simply a form of fiat currency that is backed by the central bank and does not possess any intrinsic value. In fact, it is similar to private digital currencies in the sense that people accept these currencies merely because they believe that others will also accept them.
- It should be noted that the RBI’s digital rupee will not directly replace demand deposits held in banks. Physical cash will continue to be used by banks and people wishing to withdraw cash from banks can still do so. But they can also opt to convert their bank deposits into the new digital rupee.
Impact on various stakeholders
- CBDC is expected to promote financial inclusion. It can help extend the typically insufficient reach of existing payment systems by implementing digital distribution channels and ICT infrastructure to provide access to central bank money to majority population.
- Where maintenance of high-volume, low-value payments and other financial services is deemed unsuitable or commercially unattractive for commercial banks, CBDC can provide a government-authorised solution for storing value and making payments.
- The Digital Rupee gives India the chance to build the Digital Rupee as a superior currency for commerce with its strategic partners, eliminating its reliance on the dollar.
- India risks becoming engulfed in a maelstrom of a proxy digital currency war as the US and China compete for dominance in other markets by developing cutting-edge financial products. Today, a sovereign Digital Rupee isn’t only a matter of financial innovation; it’s also a necessity for fending off the looming proxy war that threatens our national and financial security.
- Use of CBDC can ease cross-border payments. The current financial infrastructure is a complex system of many entities. Conducting a transaction between financial institutions takes time and money because they work in different technological systems and regulation regimes. The payments took seconds, instead of days, as happens with the traditional SWIFT network for cross-border flow of funds. The cost was about half of that for conventional payments.
- The blockchain technology that underpins the distributed ledger is also capable of producing smart contracts, that is contracts that execute themselves, once payments are made.
The establishment of a Digital Rupee would allow India to empower its population by allowing them to freely utilise it in our ever-expanding digital economy and break free from an obsolete banking system. Policymakers must properly assess the potential of the Digital Rupee in India, taking into account its influence on the macroeconomy and liquidity, banking systems, and money markets.
How to structure
- Give an intro about what a digital currency is
- Explain the concept of Central Bank Digital Rupee and its features
- Explain the need for Central Bank Digital Rupee and its impact on different stakeholders- government, citizens, businesses etc
- Suggest way forward
- Conclude
Reference:
- https://indianexpress.com/article/explained/explained-what-is-the-digital-rupee-announced-by-sitharaman-in-budget-7751109
Tag:Economy