Union Budget 2022 proposes to introduce digital rupee to be issued by RBI

FM sees big push to digital economy, says digital currency will also lead to a more efficient and cheaper currency management system

Finance Minister Nirmala Sitharaman on Tuesday said that a digital rupee, using blockchain and other technologies, will be issued by the Reserve Bank of India (RBI) starting 2022-23.

“Introduction of Central Bank Digital Currency (CBDC) will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system”, said Nirmala Sitharaman in her budget speech.

In the last monetary policy meeting, RBI deputy governor, T Rabi Sankar had said, they are working on types of CBDC. One wholesale account based; and the other retail account based. “A lot of work has been done on the wholesale account based CBDC but the retail account based CBDC is complicated and will take some more time”, he had said.

The RBI has been working on introducing CBDC in a phased manner after carefully weighing its impact on various issues, including how it could hamper the deposit mobilisation abilities of banks, and its potential effect on the conduct of the monetary policy.

Many central banks of the major economies are also exploring the possibility of introducing a central bank digital currency. A CBDC is essentially a virtual currency but it is issued by the central bank and has a sovereign backing, unlike other virtual currencies.

The issue of CBDC has crept up in the last few years with the advent of private virtual currencies, such as bitcoins. While these private currencies have their own benefits, they are not backed by any government and therefore do not follow any proper jurisdiction. The wide adoption of these currencies threatens to upend the established model of fiat currencies issued by countries within a border.

“The Government and the RBI will likely use the next 12 months to think through the framework for the CBDC – and by the end of the year we can expect more clarity on questions like whether initial use cases will be limited to only wholesale use (or also retail), the role of intermediaries and whether digital rupee wallets will be interest bearing”, said Shilpa Mankar Ahluwalia, Partner & Head- Fintech- Shardul Amarchand Mangaldas & Co.

Monish Shah, Partner, Deloitte India said, “The budget announcement for launch of a Rupee Digital Currency is likely to play a catalyst in creating a future of value transfer platform that will contribute to a more resilient, innovative, and competitive payment system for households, businesses and the economy at large. This will usher in innovation around securities settlement for capital markets, atomic transactions, programmable payments around DBT and eventual cross border payments as well”.