The Reserve Bank of India this week launched the digital rupee on a pilot basis. , Photo Credit: Francis Mascarenhas
the story So Far: The Reserve Bank of India this week launched the digital rupee on a pilot basis. Initially the digital currency will be offered by a select group of public and private banks in a few major cities, which can be used for both person-to-person and person-to-merchant transactions.
What is Digital Rupee?
The Digital Rupee, or e-Rupee, is a central bank digital currency issued by the RBI. It is similar to physical cash that you carry in your wallet, except that E-Rupee is held electronically in a digital wallet overseen by the RBI. The digital rupee is recognized as legal tender by the RBI, and thus has to be accepted by everyone in the country as a medium of exchange. However, it is different from the deposit you keep in the bank. Unlike deposits, which pay interest, no interest is paid by the central bank on the digital rupees in your wallet. Deposits in banks can be converted into digital rupees and vice versa.
Is there a need for digital money?
The RBI believes that the digital rupee will make the rupee as a currency more attractive to users when compared to cryptocurrencies. Cryptocurrencies have been viewed by many investors as an alternative to fiat currencies, which progressively lose value over time due to deregulation by central banks. Since such a trend may threaten their sovereignty, central banks are trying to come up with their own digital currencies. The RBI also believes that the digital rupee will be easier and more economical to produce than physical cash notes. More importantly, unlike physical transactions, transactions made using digital rupees are more easily traceable by the authorities.
what are its dangers?
The introduction of central bank digital currencies internationally has worried many who believe it could disrupt the banking system. When the interest rates offered by banks are lower, people may be more inclined to convert their bank deposits into digital currencies as they will not lose much in the way of interest income by making the conversion. Such an event could reduce the banks’ ability to hold cash and hinder the banks’ ability to make loans. It should be noted that the ability of banks to make loans is affected by the amount of cash held in their vaults. This is because a bank’s cash position determines its ability to expand its loan book while keeping the bank’s risk under control. Digital rupee can also play an important role in India’s transition towards a cashless society. An increase in the use of the digital rupee could eventually free up banks from having to hold enough cash deposits before expanding their loan books. This could happen if digital rupee deposits are treated at par with other forms of virtual money such as deposits initially created by banks as loans. In such a case, banks would be freed from the risk of bank runs, which traditionally act as a check on uncontrolled expansion of loan books.
What do the critics say?
Critics are not so enthused by the idea of a digital rupee. They point to the power that digital currencies give central banks to monitor economic activity, and they believe it can act as a deterrent to economic growth if legitimate economic activities are not allowed by governments. Activities considered illegal. Central bank digital currencies may also have more of a future as an alternative to private cryptocurrencies. Private cryptocurrencies are not in demand among some investors simply because they are digital. Instead, they are considered better stores of value, exhibiting more stable purchasing power than fiat currencies.