Future roadmap for RBI’s CBDC

Subject: Economy

Section: Monetary policy and Banking

Key points:

RBI’s annual report shows that ₹10.69 crore of wholesale e-rupee and ₹5.70 crore of retail e-rupee have been issued till March 2023.
Retail e-Rupee: Customers appear reluctant to use e-rupee for several reasons:
- Money transferred to the wallet does not earn interest whereas their funds can continue to earn interest from bank accounts, while linked to UPI.
- Concerns about the absence of complete anonymity, akin to cash, with the transactions leaving a digital trail.
- Limited use-cases,
- Worries over data privacy and security.
Wholesale e-Rupee: The pilot has been limited to settlement of secondary market transactions in G-secs. There are merits to use of CBDC for wholesale segment:
- Using CBDCs for cross-border payments as an alternative to the dollar and to the SWIFT messaging system. (importance seen during Russo-Ukraine war)
- Adoption of CBDC wholesale easier as it essentially serves the purpose of accounting entries
- Absence of a third party will reduce settlement risk for customers.

Concerns to be addressed by RBI:

Uncertainties in launching a sovereign digital currency not properly evaluated such as the impact it may have on bank deposits and system liquidity.
May need a rethink on anonymity. Anonymity being considered only for low-value transactions only, but this may not be acceptable to users.
Robustness of the technological infrastructure and the extent of data privacy offered will also be important in ensuring acceptance.

SWIFT vs CBDC

CBDCs may serve the same purpose of settling accounting entries as SWIFT.
Making CBDCs interoperable is difficult.
SWIFT likely to continue till one single CBDC achieves dominance as preferred digital currency. China is already ambitious in this area with it using ‘debt trap diplomacy’ to push its CBDC as replacement to SWIFT.
Europe is likely to push its CBDC for settlement of other CBDC on SWIFT.