Since the announcement of launching of digital rupee by honorable Prime Minister Narendra Modi in early February 2022, digital currency is in discussion. Let us first understand what is digital currency?
Digital currency is a form of currency that is available exclusively in electronic form. Digital currency generally does not have a physical form unlike currencies with printed bank notes or minted coins. The lack of physical form allows nearly instantaneous transactions over the internet and removes the cost associated with distributing notes and coins.
It is accounted for and transferred using electronic codes in computers. Other names of digital currency are – digital money, electronic money, electronic cash & cyber cash. Digital currency is accessible through electronic devices like mobile phones, computers, etc. Types of digital currency are: crypto currency, virtual currency and central bank digital currency also called CBDC.
Talking about whether India is ready for digital currency or not. Many experts believe it is a boon to Indian economy. Since digital India is expanding so fast and has wide spread reach even many villages are using digital transactions like UPI, etc. The launch of a new digital rupee in the upcoming year will boost financial inclusion in Asia’s No.3 economy and eventually make more Indians cut their dependence on physical cash, according to accountants, currency exchange operators and crypto experts.
The RBI is expected to launch the digital currency from the financial year 2022-23. According to the Union Budget, it will be backed by blockchain technology. The Prime Minister said the Central Bank Digital Currency (CBDC) will strengthen the digital economy. There was a recent news where RBI plans to launch India’s first central bank digital currency but they also reiterated to maintain a calibrated approach. The aim of introducing CBDC is to reduce cost around currency management in the economy & also to facilitate easy transactions digitally.
Currently work is going on around building the pillars of digital currency like data privacy, blockchain technology. In addition to this the possible impact on banking sector is also closely observed. CBDCs could affect the transactional demand for deposits in the banking system. So to that extent the deposits creation would also get affected negatively and to that extent the ability to create credit by the banking system also goes down. So to the extent the transactional deposits starts to move away from the banking system, the average cost of deposit may go up.
So, there is a huge risk to demand deposits in banking system, if CBDC is introduced. But one reliving thing is that holding CBDC will not attract interest. As a coin have 2 sides same is the case with digital currency.
Some of the benefits of introducing digital currency are: fast transactions, constant payment tracking, lowers money management cost in the economy from governments standpoint, easy accessibility, etc.
Some of the disadvantages of digital currency are: security issue, currently there will be low demand in the market as it will take few months to create proper demand and supply for using and accepting the CBDC payments.
Fig.1: CBDC status in different countries
So, still many countries are doing research on this type of digital currency as it is visible from above fig.1
Launching in a balance way like well calibrating is important, over a period of time digital currency to be specific digital rupee backed by RBI will be successful. But in order to meet the short-term demand and people are still preferring UPI payments. This will take time as of now early adopters will definitely initiate the demand and supply for CBDCs in India. With growing fintech I believe India is ready for digital currency and it will also be widely accepted and will grow.
Author: Tejas Vaidya
Founder FinTorch
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