A “nuanced” and “calibrated” approach is required for India’s first central bank digital currency, or CBDC, Reserve Bank of India Deputy Governor T Rabi Sankar has said. The senior RBI official said this is essential as the new currency will have different implications for the economy and monetary policy. The RBI has plans to come out with its own CBDC by 2022-23, using blockchain technology.
“Given the large number of uncertainties about which model works, which design works well in terms of impact on the banking system, on data privacy and on monetary policy, I think almost all central banks, and we are no exception, are likely to go in. for a very careful and calibrated nuanced way,” he said at an event organized by ICRIER on Thursday.
Noting that one of the principles for introducing technologies, especially for a central bank, is that it “does no harm,” he said, “I think central banks would do this in a very calibrated, gradual way, and the impact would assess down the line and then make those connections to what is most in demand.”
Speaking about the implications of CBDCs, he said, “While these motivations exist, one has to realize that there is virtually no global experience at this point regarding a few things, such as CBDCs that can affect the banking system.” CBDCs could affect transaction demand for deposits in the banking system, he said.
“To the extent that that happens, the creation of deposits would be negatively affected and to that extent the ability to create credit by the banking system also decreases…could go up, leading to a slight upward pressure in general.” on the cost of funds in the system itself,” he said.
Speaking about the RBI’s deputy governor’s comments on CBDC, Harish Prasad, chief of banking at FIS, said it is clear that the Reserve Bank is trying to strike a good balance on the proposed CBDC, taking into account several considerations .
Chief among these is the risk that the CBDC could pose to demand deposits within today’s banking system, i.e. if people preferred holding CBDCs to holding demand deposits with banks. This could have far-reaching implications for the functioning of the banking system and for the cost of funds, and it is crucial that this does not ultimately become the result of the proposed CBDC. It has been reiterated that holding money in the form of the proposed CBDC does not entitle the holder to any interest, and this resolves this risk to some extent,” he said.
“The vice governor’s statements also shed light on some of the key drivers behind India’s CBDC. The need to lower the levels of physical currencies to improve efficiency and lower costs around national currency management has long been known,” Prasad added.
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