The Merits Of An RBI Digital Currency Outweigh Risks

Context: Reserve Bank of India (RBI) deputy governor T. Rabi Sankar recently spoke on the possibility of a central bank digital currency (CBDC) for India. The merits of an RBI digital currency outweigh the risks.

Merits of RBI’s CBDC plan

• Central Bank perspective: Efficiency of issuance for countries where cash usage is high, and enabling an alternative mode of digital transactions in countries with low demand for cash.
• International trade and investment perspective: With more than 50 countries looking into the possibility of introducing their own CBDCs, the future of globalization is CBDC-based.
• Cost and time advantage: CBDCs have clear advantages in cost and time when compared to the current international payment system based on SWIFT.
• Addressing risks: CBDCs remove risks associated with interbank settlements and provide a safer option compared to private virtual currencies.
• S under these circumstances, India will need to have a CBDC.
• Preparing for risks of possible dollarization-like scenarios: Because of the possibility of CBDCs of other countries becoming international currencies and generating substantial domestic demand in India.
• In order to have a say in these international settlements, it will be very useful for India to have a credible and working CBDC.
• Helps domestic digitalization: CBDC can help bridge the digital divide in financial inclusion. 
• E.g. CBDCs may provide an alternative to the New Umbrella Entities (NUE) by working outside the banking sector through the postal system.

Challenges associated with CBDC plan

• Liquidity problem: That banks may face this new institutional mechanism.
• Solvency problem: The existing issues in the banking sector may be compounded by the potential solvency problem of banks, manifested in high non-performing assets.
• Rise in cybersecurity concerns: Given the digital nature of CBDCs.
• Complexities and uncertainties: While CBDCs are expected to provide a safer alternative to private virtual currencies, it is still unclear how this will be achieved.
• Would such private currencies be prohibited, or would the CBDC coexist as a competitor to them?

Conclusion: Adoption of CBDCs is the only economic development that is happening at a global scale without any historical precedent to fall back on. Thus, it is very important that every aspect of this development is scrutinized before implementation.