RBI open to digital currency, examining the need to introduce CBDC

The Reserve Bank of India (RBI) on Monday said it is examining the need to introduce a central bank digital currency (CBDC) in the country. In case the need to have a CBDC arises, the apex bank will also look for ways to operationalise it.

“In India, the regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks. Nevertheless, the RBI is exploring the possibility as to whether there is a need for a digital version of the fiat currency,” the RBI said.

A CBDC is legal tender and a central bank liability in digital form denominated in a sovereign currency and appearing on the central bank’s balance sheet. 

It is in the form of electronic currency which can be converted or exchanged at par with similarly-denominated cash and traditional central bank deposits.

The RBI also said that migration from a predominantly cash-based economy to a digital one is a “work in progress,” despite the digital mode rising manifold in the last decade. 

From 4.98 billion transactions with a value of Rs 96 trillion in FY11, digital payments have grown to 16.23 billion transactions with a value of Rs 3,435 trillion in FY20. This represents a compound annual growth rate (CAGR) of 12.54 per cent and 43 per cent in terms of volume and value, respectively.

And, despite growth in adoption of digital payments across geographies and cross-sections of the society, the rate of adoption has been different. This is because of lack of digital financial awareness and inadequate digital financial literacy. 

“Considering the diversity of users in the payment ecosystem, there is still a long road to be travelled, especially across geographies (tier III-VI centres) and societal cross-sections (like senior citizens and migrant workers),” the RBI said in its booklet on Payment Systems in India 2010-2020.

Hence, the central bank is of the opinion that there is a need for a targeted approach in digital financial awareness and digital financial literacy. This will help it cater to potential areas and probable user segments which will help attain desired levels of digital payment adoption.

Similarly, among other challenges, the RBI said while there are a lot of options in the digital payments space for smartphone customers, it is lacking for non-smartphone users. 

“There is scope for innovation in digital payment option to non-smartphone users, who are on a decline. These users would still number around 50 crore by 2022,” said the RBI.

“Providing an option of off-line payments through mobile devices and stored value component on cards are expected to further adoption of digital payments”, it added. A pilot scheme (for non-smartphone users) was rolled out in March 2020. Based on the experience gained from this, a decision will be taken by the RBI on roll out of the scheme.

Furthermore, another roadblock in the goal of achieving a predominantly digital economy is the cost associated with such payments. While cash usage is generally free, the cost of installation of infrastructure like PoS dissuades certain small merchants to adopt them. 

“Low-cost digital acceptance solutions like QR codes have helped in addressing this gap to a certain extent (there are over seven crore QR codes deployed across the country). There is scope for more innovative products and further expansion of QR code deployment,” said the apex bank.