‘CBDC launch in calibrated, nuanced manner’

Reserve Bank of India (RBI) Deputy Governor T Rabi Sankar on Thursday said the Central Bank Digital Currency (CBDC) will significantly bring down time taken for cross-border transactions and make transactions real time.

As far as India is concerned, he said the RBI is looking at CBDC as just the digital form of paper currency and no distinction whatsoever. Highlighting that CBDC would have cost and distributional efficiency, Sankar said the other motivation for introduction is settlement efficiency.

Addressing an event organised by ICRIER, he said a nuanced and calibrated approach is essential for launch of India’s maiden digital currency as it would have various implications for the economy and monetary policy. The RBI is planning to come out with a central bank backed digital currency using blockchain technology in 2022-23.

“Given the large number of uncertainties in terms of which model works, which design works well in terms of its impact on the banking system, on data privacy on monetary policy, I think almost all central banks and we are no exception will probably go in for a very careful and calibrated nuanced manner,” the RBI Deputy Governor said.

“The essential learning does not come from global experience but basically comes from your own experience,” he said. Observing that one of the principles for introduction of any technologies, especially for a central bank, is that it should “do no harm”, Sankar said, “I think central banks would go about it in a very calibrated, graduated manner, assessing impact all along the line and then making those connections with what is most demanded.”

About the implications of CBDCs, he said, “while these motivations do exist, one must realise that global experience is virtually non-existent at this point in time on a few things like CBDCs might affect the banking system.” CBDCs could affect the transactional demand for deposits in the banking system, Sankar added.

“To the extent that happens, the deposit creation would get affected negatively and to that extent the ability to create credit by the banking system also goes down … to the extent low-cost transactional deposits move away from the banking system, the average cost of deposits might go up, which generally would lead to slight upward pressure on the cost of funds in the system itself,” he said. The other implication would be on monetary policy, Sankar said, adding that surveys done by BIS and others seem to indicate that most central banks feel it will have an impact on monetary policy and impact on transmission. With regard to stable coin, he said, it could emerge as a much bigger threat to dollarisation than a cryptocurrency.

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