Reserve Bank of India (RBI) Deputy Governor T. Rabi Sankar has outlined the implications of India issuing a central bank digital currency, the digital rupee. “I think central banks would do it in a very calibrated and graduated way, assessing the impact all the way down the line,” he explained.
RBI Deputy Governor Discusses Central Bank of India Digital Currency
RBI Deputy Governor T. Rabi Sankar spoke about the Country’s Central Bank Digital Currency (CBDC) on Thursday at an event organized by the Indian Council for Research on International Economic Relations (ICRIER) . He also highlighted the potential implications for India’s financial system and monetary policy, PTI reported.
The RBI will issue a central bank digital currency in this fiscal year, Finance Minister Nirmala Sitharaman announced during her budget speech in February. Prime Minister Narendra Modi has described that the digital rupee will be the digital form of the physical Indian rupee and will be regulated by the RBI. “The digital rupee will revolutionize the fintech industry,” he said.
Commenting on the different CBDC models, Deputy Governor Sankar pointed out that there are many “uncertainties as to which model works, which design works well in terms of the impact on the banking system, on data privacy, on Monetary Policy”. He issued the following opinion:
I think almost all central banks, and we are no exception, will likely take a very cautious, calibrated and nuanced approach.
Stressing that central banks should “do no harm” when introducing new technologies, he said: “I think central banks would go about it in a very calibrated and graduated way, assessing the impact throughout. down the line and then making those connections to what’s most in demand.”
The RBI Deputy Governor went on to highlight some of the benefits of issuing a digital currency, including cost, distribution and settlement efficiencies. He noted that the digital rupee will drastically reduce the time needed for cross-border transactions and make them real-time.
Discussing how central bank digital currencies could affect India’s financial system, he cautioned, “one has to realize that global experience is virtually non-existent at this stage on a few [how] CBDCs could affect the banking system.
Deputy Governor Sankar explained that CBDCs could affect the transactional demand for deposits in the Indian banking system. He clarified that if this happened, “the creation of deposits would be negatively affected and to that extent, the ability to create credit by the banking system would also decline.” He added:
To the extent that low-cost transactional deposits move away from the banking system, the average cost of deposits could increase, which would generally put some upward pressure on the cost of funds in the system itself.
At the ICRIER event, V. Anantha Nageswaran, Chief Economic Advisor to the Government of India, said that launching a CBDC will not remove the need to regulate cryptocurrencies in the country as they will continue to exist.
The RBI Deputy Governor also commented on stablecoins, warning that they could become a much bigger threat to dollarization than a cryptocurrency. As for cryptocurrencies, he believes that they cannot be used in small transactions due to their extreme volatility.
The Indian government is currently working on a framework for cryptocurrency. Finance Ministry officials reportedly consulted international organizations on the matter, including the International Monetary Fund (IMF) and the World Bank.
Meanwhile, cryptocurrency income is now taxed at 30% with no loss offsets or allowed deductions. On July 1, a 1% withholding tax (TDS) will also be levied on crypto transactions.
What do you think of RBI Deputy Governor Sankar’s comments? Let us know in the comments section below.
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