Take a cautious approach in launching a digital currency, says report

Developing it could have some hazards, including those to institutions, end-users, and reputation of the central bank, says NCAER working paper

India should take a cautious and gradual approach towards launching a central bank digital currency (CBDC) as developing it could have some hazards, including those to institutions, end-users of retail CBDCs, and the reputation of the central bank, says a National Council of Applied Economic Research (NCAER) working paper.

The paper has been co-authored by Poonam Gupta, director general of NCAER and part-time member of the Economic Advisory Council to the Prime Minister.

“We argue that many of these arguments for CBDCs have been advanced uncritically. Their proponents fail to acknowledge that some of these goals can be advanced at lower cost and at less risk through alternative means,” the report stated.

The paper said that while a CBDC would have more penetration compared to credit or debit cards, the reach of Unified Payments Interface is already widespread. “In its history to date, UPI has hosted some 70 billion transactions, some as small as one rupee, making it the world’s largest real-time payment system by transactions,” it said.

The paper said that while greater financial inclusion is also one of the reasons behind pushing CBDC, it can also be achieved through simply opening more bank branches in rural areas and providing services through non-bank partners and agents.

“A third rationale sometimes heard for CBDC issuance is to enable the central bank and the government to retain control of the payments system in the face of stablecoins and other private payment rails. If the concern is the concentration of payments in a single or small set of private hands, then the obvious solution is to strengthen regulation of those private providers,” it said.

“In view of the range of questions still to be answered, India should take a cautious and gradual approach toward launching a CBDC. To start, it may take a year for the RBI to form and make available an analysis of the rationale, impact, scope, design, and the pace of the launch first of its CDDC pilots and then the digital currency itself,” the report stated.

The RBI will need to assess the readiness of the banks, other financial intermediaries, and the public to use that digital currency; its impact on the conduct of monetary policy and its transmission; and its implications for capital flows, the exchange rate, and the composition and management of foreign reserves.

“It would be appropriate, as has been the practice for other initiatives, to constitute and consult expert groups and to put their analyses and recommendations in the public domain. It could then take an additional two-three years to run pilots and assess their results,” it said.

In the Indian context it will be important to analyse the benefits and challenges of CBDC availability for population groups with different levels of literacy, access to the hardware, and internet connectivity, and to adjust design and rollout strategies in light of this analysis, the report stated.