India has taken a step closer to accepting cryptocurrencies after years of hesitating, as the country tries to stay up with the global trend toward digital assets. Finance Minister Nirmala Sitharaman said at the budget session that the Reserve Bank of India will begin producing Digital Rupees, also known as Central Bank Digital Currency, in 2022-23, boosting India's economy. The notion of "Central Bank Digital Currencies" (CBDC) has been around for a while, but with the advent of Bitcoin and nations like China releasing their own digital currency, the Digital Yuan, to compete with the US Dollar on a worldwide scale, it has gained traction.

 

CBDC is similar to currency issued by a central bank, however, it is not printed on paper (or polymer). It is a sovereign currency in electronic form, and it would appear on a central bank's balance sheet as a liability (currency in circulation). A CBDC's underlying technology, shape, and application may be tailored to meet individual needs. CBDCs should be able to be exchanged for cash.

 

Only in the last decade has the concept of digital money been widely studied by central banks, economists, and politicians. CBDC is a digital or virtual currency, but it is not the same as the private virtual currencies that have sprung up in recent years.

 

Private virtual currencies are the polar opposite of standard monetary concepts. Because they have no intrinsic worth, they are neither physical commodities nor broad claims on commodities; specific claims that are comparable to gold appear to be entirely speculative. Unless they qualify as security tokens under separate legal frameworks, they normally do not reflect any person's debt or obligation. 

 

CBDCs are essentially virtual/electronic versions of fiat currency. With the fast rise of cryptocurrencies, the growing popularity of blockchain technology, and the related benefits, their attractiveness or interest in issuing them has gained traction. Advocates of CBDCs assert that, among other things, they will increase financial inclusion, reduce financial transaction costs, especially for cross-border transactions, provide the benefits of a different payment system, add another weapon to central banks' monetary policy toolbox, and possibly have detrimental effects on corruption and money laundering. However, depending on the economic situation in each nation, the amount to which these advantages are realized will differ.

 

On the other hand, there are a number of potential dangers linked with the use of CDBCs. There are clear ramifications for the banking sector if retail CBDC accounts are interest-bearing. Depositors may also opt to relocate away from commercial banks during moments of great uncertainty, triggering financial turmoil. Then there's the issue of whether CBDCs can provide the same level of privacy as cash.

In nations with well-capitalized financial institutions, retail access to the central bank's IOUs may not be a huge concern. However, in India, this is a significant advantage. A CBDC, which is a liability of the RBI, will help Indian depositors avoid losses while dealing with commercial banks.

 

 CBDC's adoption was justified for three primary reasons. Firstly, faced with diminishing paper money usage, central banks (such as Sweden) are attempting to popularise a more acceptable electronic form of cash. Secondly, countries that use a lot of physical currency want to make the process of issuing currencies more efficient (like Denmark, Germany, Japan, or even the United States). Lastly, central banks attempt to accommodate the public's need for digital currencies, as seen by the growing usage of private virtual currencies, while avoiding the more harmful effects of such private currencies.

 

The technological ecology of the Digital Rupee, like present payment systems, might be vulnerable to cyber-attacks. Furthermore, the rise in digital payment-related frauds may expand to Digital Rupee in places where financial literacy is poor. As a result, organisations dealing with the Digital Rupee must adhere to strict cybersecurity guidelines while encouraging financial literacy. 

 

The economy's capacity to adopt the Digital Rupee is partly influenced by technical preparedness. For the construction of a population-scale digital currency system, high-speed internet and telecommunication network, as well as the availability of sufficient technology for storing and trading in Digital Rupee with the general public, is necessary. Low levels of technology adoption in India's disadvantaged communities might limit the reach of the Digital Rupee and exacerbate existing financial goods and services disparities.

 

CBDCs have the power to impact public opinion and the Indian economy in general. If demand for CBDCs exceeds supply, and CBDCs are primarily issued through the banking system, extra liquidity may be required to compensate for currency leakage from the banking system, as projected. 

 

Because negative interest rates are ineffective owing to the shift to cash, there have been a lot of discussions recently about using negative interest-bearing CBDCs to boost monetary policy effectiveness. Many advanced countries have been limited in their capacity to lower interest rates due to the exceptionally low inflationary environment. If money could carry a negative interest rate, the monetary transmission of negative policy rates to boost demand would be more effective.

 

Consequently, the argument is presented for paying a negative interest rate on CBDC as an unconventional monetary policy tool to promote consumption. Any item that pays interest, whether positive or negative, is technically not a currency; as a result, such measures should be approached with prudence, since they might have an influence on the Indian financial system. Interest-bearing CBDCs have the potential to reduce the attractiveness of fixed deposits held by banks, reducing their lending capacity in India.

 

The deployment of the Digital Rupee has the potential to provide significant benefits, such as reduced reliance on currency, enhanced seigniorage due to lower transaction costs, and reduced settlement risk. CBDC might pave the way for a more dependable, efficient, trustworthy, regulated, and legal tender-based payment system. To be sure, there are hazards involved, but they must be carefully balanced against the potential benefits. The technology, whether it's blockchain or not, will have to strike a balance between the often-conflicting aims of speed, scalability, audit, security, and privacy.