The recent announcement by India’s Ministry of Finance that it intends to launch a central bank digital currency (CBDC) will completely change how the country perceives money.
Being controlled and monitored by the Reserve Bank of India (RBI), the digital currency will be a legal tender and a digital avatar of India’s fiat currency. It is expected to have a transformational impact on the way Indians shop, save and do business.
Of late, the affinity for digital payment methods in the country has grown tremendously. The new CBDC would further accelerate this trend and provide safe payment instruments, thereby reducing cash handling costs since many transactions will be made using a digital representation of money and will be traceable.
This shift from cash to digital currency will also bring those in “last mile” delivery and supply chain jobs into the formal financial fold so that the economy becomes more transparent and efficient.
Tier three and four towns and beyond are likely to gain the most from this dramatic shift. Extensive and inexpensive access to digital money and offline transactions will open the door to financial services for people without traditional bank accounts.
With time, these rural areas will become increasingly connected, facilitating trade and market integration. This will further fast-track the digitisation of the economy and promote financial and digital inclusion. A CBDC would also go a long way in helping government benefits reach their intended recipients instantly so that unbanked and underbanked individuals can access their money without extra charges. It would also open doors for more formal savings opportunities and possibly easier and more cost-effective access to loans at the last mile which will result in better monetary policy transmission.
The design and application of a wholesale or retail CBDC is a vital aspect for determining the trail of funds. What features a CBDC has depends on how the central bank envisions the future and the subsequent framework that is put in place. While a retail CBDC is targeted at the general public, a wholesale CBDC is issued only for financial institutions. This is probably the best option for an emerging economy like India, mainly to promote financial inclusion by accelerating the shift to a cashless society and reducing cash printing and handling costs. A wholesale CBDC also holds reserve deposits with a central bank. It could be used to improve payments and securities settlement efficiency and to reduce credit and liquidity risks.
Moreover, a wholesale CBDC can also simplify cross-border payment infrastructure by strongly reducing the number of intermediaries involved. Currently, cross-border payments work on the Swift framework, and despite numerous financial innovations still travel through various intermediaries. With CBDCs, payment efficiency can be increased, authentication can be improved, and finally, transaction costs can be minimised, thereby benefiting retail users.
For decades, India has consistently been among the world’s largest recipients of remittances. The operational model of remittances has major implications for underdeveloped countries because they frequently involve exorbitant fees and long waits for financial transfers. CBDC will offer a viable solution to make cross-border remittances cheaper and faster and will allow smaller players to enter and establish new remittance corridors and existing players to serve the rural heartlands.
While it is fairly new, the popularity of digital currency will depend on both consumer adoption and merchant acceptance. Given that India is still tech-shy, on the consumer side, it will have to facilitate easy, secure and hassle-free transactions, while on the merchant side, it will need to broaden their customer base while reducing the transaction costs compared to current payment methods, while also increasing footfall.
The adoption strategy of digital currency in a fast-changing payments landscape would require balancing the needs of the majority of consumers, mostly at the bottom of the pyramid. Going forward, CBDC would need to complement and easily link to e-wallets, the UPI infrastructure and also bank accounts, thereby offering both the merchant and end-user security and convenience.