Opinion: Digital Rupee Needs More Thought, Less Haste

ndtv.com:

India has surprised the payments world by announcing that its central bank will issue a digital currency as early as the coming financial year, a crucial decision that most other major economies are refusing to make in a hurry. According to Finance Minister Nirmala Sitharaman, an electronic representation of India's legal tender will give a big boost to its digital economy. How valid is that claim, and how risky is a hasty transition to a central bank digital currency, or CBDC?

A digital rupee will be like banknotes, but minus the ATMs. Users will be able to transfer purchasing power from their deposit accounts into their smartphone wallets in the form of online tokens, which will be a direct liability of the Reserve Bank of India — just like cash. 

Retail access to the central bank's IOUs may not be a big deal in countries with well-capitalized financial systems. But this is a major benefit in India. As researcher Bhargavi Zaveri observes in the blog IndiaCorpLaw, depositors at 21 Indian lenders have been restricted from withdrawing their funds due to bank distress in the last few years. “A CBDC, which is a liability of the RBI, will mitigate the risk of losses that Indian depositors face when dealing with commercial banks,” she says.

Consumers may find the digital rupee to be a safer alternative to bank deposits, which underpin Rs 76 lakh crore ($1 trillion) in annual real-time payments via apps such as Walmart Inc.'s PhonePe, Alphabet Inc.'s Google Pay and the homegrown Paytm. 

But therein lies the risk as well. If electronic cash becomes popular, and the RBI places no limit on the amount that can be stored in mobile wallets, weaker banks may struggle to retain sticky, low-cost deposits. And even as they lose that