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India is well-equipped to manage any excess volatility in the exchange rate due to the outcome of the US election results, said T RABI SANKAR, deputy governor of the Reserve Bank of India (RBI), in conversation with Tamal Bandyopadhyay, consulting editor at Business Standard, at the Business Standard BFSI Insight Summit 2024. Separately, he also spoke about how the RBI is looking to internationalise the Unified Payments Interface (UPI), and the plans for the Unified Lending Interface (ULI) and central bank digital currency (CBDC). Edited excerpts:
What do you think will be the impact of the US presidential elections?
There will be short-term volatility in most markets because we are seeing a change in government in what is the largest and most powerful economy in the world. Beyond that, the impact will depend a lot on US involvement in global tariffs and how it manages its fiscal policy. It will also depend on US engagement with geopolitical issues. So, it is very difficult to predict how things will play out or impact the markets in the medium term.
From India’s perspective, as far as the exchange rate is concerned, we are well-equipped to manage any excessive volatility. Additionally, in terms of reserves, the health of the banking system, and the economy, we are well-placed.
What is next in store for UPI?
UPI is a payment instrument that has caught the world’s attention due to its efficiency in digital transactions and how it is catching on among both retail and business users. The number of UPI transactions per month is increasing, now reaching about 535 million transactions per day. What we need to ensure is that this growth continues and extends to areas of the economy and sections of the population where UPI is not yet being used. This will not only improve payments for these sections but also increase the efficiency of our economy.
We also need to ensure that UPI can be used offline and on feature phones. The benefits we see with UPI in the domestic space must extend to the global space as well. We have already started efforts to link UPI with other countries such as Singapore, Mauritius, and others.
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We should aim to expand UPI’s use worldwide so that any Indian with a UPI account can make payments globally. Discussions are ongoing with various advanced economies, and I hope this pans out to make this a reality.
Has the increased adoption of UPI led to a decline in currency in circulation (CIC) in the economy?
We are not seeing CIC decline, despite a substantial increase in UPI adoption. While the rate of growth in the circulation of notes is slower than in earlier years, we cannot draw any definitive conclusions from this. It would be too simplistic to assume that CIC would go down as UPI transactions increase because CIC relates to money, and people hold money not only for transactions but also as a store of value. As long as UPI and digital payments increase, I don’t think I will lose sleep over CIC also rising.
There are too many frauds happening in UPI…
The number of retail frauds is increasing. However, we are seeing a reduction in the incidence of fraud recently. We have to continue raising awareness, encouraging people to be cautious, and emphasising digital hygiene. We also need to develop digital tools to identify these frauds before they happen. We are working on an artificial intelligence (AI)-driven database to train systems to detect these frauds.
The RBI governor recently cautioned that there are risks associated with AI. What is your take on the increased adoption of AI in the financial ecosystem?
AI and machine learning (ML) are unlike any technologies we have seen in the past. AI is adopted at such a fast pace that it doesn’t give the economy adequate time to adjust to the new systems. Most other technologies reduce human effort, but this technology has the potential to completely replace human involvement. We must be very careful about the impact these technologies can have on systems and institutions.
Powerful as it is, we must be cautious in how we adopt AI-ML technologies. While the benefits are immense, we need to consider the broader impacts at the system level. The approach to AI should involve a sandbox structure.
Can RBI regulate financial technology (fintech) companies?
Fintechs that are financial entities and deal with funds will be regulated. If they are involved in lending, they will be regulated by the RBI; if they deal with mutual funds, they will be regulated by the Securities and Exchange Board of India. As long as they are part of the financial system, they will be regulated.
As the role of fintechs in the system increases, each regulator will need to decide the best way to ensure that the financial sector remains well-ordered and disciplined. Our approach is that it is important for people providing services to the financial sector to understand the rules of behaviour in this sector. It is probably best if this understanding comes from within, and self-regulation is the ideal way to proceed.
Over the past two to three years, fintechs’ understanding of legal and regulatory requirements has improved. The sector itself is learning, and we are engaging with them through the Reserve Bank Innovation Hub and directly. They are also engaging more with us, and with self-regulatory authority, this engagement will only strengthen. For now, this should suffice to meet our basic objective: Innovation must happen, but the financial sector must remain an ordered marketplace.
How close or far are we in the implementation of CBDC?
There is a reason we introduced the CBDC as a pilot: We wanted to see how the technology pans out and which technology is best for introducing the CBDC. There are no global benchmarks to follow. Conceptually, I do not doubt that this technology will take off in the future, but we need to understand how it will affect the current financial system, including the use of money, deposit mobilisation, credit creation, and currency demand. We don’t yet understand these dynamics. Globally, there is no precedent we can follow. So, we are content to proceed slowly and continue with the pilot schemes.
How will ULI play out in the credit ecosystem?
In India, infrastructure is created in the public sector, and the private sector is given democratic access to this infrastructure to innovate with products like UPI. Similarly, ULI is being developed.
We are creating infrastructure that will connect lenders with all the information they need to make credit decisions. It is another form of digital public infrastructure, which will likely do in the lending space what UPI has done in the payments space. The largest loans in the system are for personal loans, Kisan Credit Cards, housing loans, and loans to micro, small and medium enterprises. Once more states and banks join in, ULI will operate at full scale.
Where are we on the European Securities and Markets Authority (ESMA) issue?
The RBI has consistently taken the position that ESMA is being extra-jurisdictional in telling us how we should regulate. We were willing to accommodate them if they had trusted us as regulators. They are probably constrained by their law, which is extra-jurisdictional. Discussions are ongoing. It is not possible to agree to this without compromising on the sovereignty of policymaking.
The issue now is that the deadline, which passed two years ago, has expired. The country regulators of European banks had given them time until October of this year. However, they have now come back and said that we should work towards adhering to ESMA requirements, as long as we provide updates. So, there is no specific deadline now.