Path to the digital rupee

Context: Recently, Nigeria launched its non-interest-yielding central bank digital currency (CBDC) — the eNaira. Countries including India are looking to shift to digital currency.

Challenges before Central Bank Digital Currency (CBDC)

• Matching domestic priorities with design features: Eg.  Whether digital currency to be interest bearing or not.
• Monetary policy re-design: An economy that adopts an interest-bearing CBDC could make the interest rate on CBDCs the main tool of monetary policy transmission domestically.
• Existential threat to banking system: CBDCs with interest-bearing instruments leads to reduction of bank-held deposits. 
• Banks may increase deposit rates, but this leads to a higher lending rate to preserve margins thus forcing them to engage in riskier lending and hold relatively risker, less-liquid assets.
• Economic risks: The resultant shrinking of balance sheets will lead to a more pronounced disintermediation role for financial institutions which could have long-term effects on financial stability, and facilitate easier bank runs.

Conclusion: RBI focus is on desirability of introducing CBDCs, but the path to a “Digital Rupee” is not clear.

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