DIGITAL INDIAN RUPEE.

Central banks across the world have been exploring the feasibility of introducing Central bank digital currency (CBDC).In India  the  High Level Ministerial  Committee constituted in November 2017 examined the policy and legal framework for regulation of virtual/crypto currencies ,had recommended the introduction of CBDC as a digital form of  fiat money in  India. Finance minister in her budget announced the decision to introduce Central Bank Digital Currency by Reserve Bank of India using block chain and related technologies in 2022-23. Apart from giving a big boost to Digital economy the digital rupee is expected to lead to a more efficient and cheaper system of currency management. Digital currency is a form of currency that is available in digital or electronic form and not in physical form.It is also called digital money, electronic money, virtual currency or cyber cash. Digital money is exchanged using technologies such as smartphones, credit/ debit cards, and online currency exchanges.

Reserve Bank of India believes that there is an increasing demand for digital currencies as is evident from the rise of private digital currencies such as Bitcoin and ever increasing use of  digital payments. Moreover the cost of issuing digital currencies is very much lower than the cost of printing and distributing physical cash.As per the prevailing currency management system RBI print currencies in several denominations at its captive note printing presses , stores the notes in 20 currency vaults at its regional offices and feed there from to about 4000 currency chests being managed by commercial banks across the length and breadth of the country. Once currency gets soiled after repeated use they are brought back to the  RBI offices through the same distribution network and destroyed. 

 In October 2020 Bahamas launched world's first CBDC. Several countries including USA, European union,Britain and China have been working to introduce it.As per available current   data on CBDC out of 91 countries tracked 9 launched digital currency, 14 doing pilot work,40 doing research 7 inactive and 2 countries namely Finland and Denmark had canceled the work on CBDC. The case for CBDC for emerging economies is that  not only for the benefit they create in payment systems but also might be necessary to protect public from volatile private virtual currencies .Private digital crypto currencies are stored in and transacted through designated software applications and networks in digital form. Private virtual currencies like Bitcoin have mushroomed over the last decade and there is increasing proliferation of digital payments as well.CBDCs depending on its use can cause a reduction in transaction demand for Bank deposits. Since transactions in CBDC reduces settlement risk they also reduce the liquidity needs for settlement transactions. According to RBI introduction of CBDC has the potential to provide significant benefits such as reduced dependency on cash, higher seignorage due to lower transaction costs and reduced settlement risk. CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender based payment option. It is argued that CBDCs are reliable sovereign backed alternative to private currencies which on the  other hand are volatile and unregulated. 

 Despite the merits of CBDCs mentioned above there are associated risks involved. For instance by providing a genuinely risk free alternative to Bank deposits it would lead to a shift away from bank deposits to digital rupee. Reduced    disintermediation of banks carries its own risks. If banks begin to lose deposits over time their ability for credit creation gets constrained. When banks lose large chunk of low cost transaction deposits their interest margin might come under stress leading to increase in cost of credit. Thus potential costs of disintermediation mean it is important to design and implement CBDC in a way that makes the demand for CBDC vis-a-vis bank deposits manageable. Availability of CBDC makes it easy for depositors to withdraw balances if there is stress in any bank. Flight of deposits can be much faster compared to  cash withdrawal. On the other hand availability of digital rupee might reduce panic runs since depositors have knowledge that they can withdraw quickly. But since CBDCs are only currency and therefore do not pay interest their impact on bank deposits may be rather limited. Unlike physical cash which is hard to trace digital rupee which is monitored by RBI can be easily traced and controlled. People operating with private digital currencies do maintain anonymity. This has raised the question and need for privacy in digital currency transactions.With regard to cyber security RBI Governor recently observed that " CBDC project is on and and central bank wants to take its time to carefully launch its digital currency. We do not want to give any time line for CBDC. RBI is examining the matter with caution and carefully calculating associated risks. The biggest of them is cyber security and the possibility of counterfeiting which need to be prevented. It is a new product and globally central banks working on CBDCs are proceeding with utmost caution, we are proceeding with due  care and caution".

 However experts observed that the first task in digital rupee introduction is  to finalize design options if not closed so far. Regarding technology implementation it is an evolutionary process. CBDC may be implemented with block chain or any other technology. Conventional non block chain technology options are plenty and stable whereas block chain technology is yet to mature .The easiest option is to get started on issuance, circulation and seignoraging of CBDC of retail nature using the existing digital payments infrastructure .pilot project will start soon. It will be ideal to introduce e rupee at the retail segment first. People averse to technology have to be brought in by providing awareness on CBDCs.Around 10 large banks may be selected to play the role of distributors of digital rupee each with about one million voluntary customers. If robust cyber security is created with appropriate penal provisions to reduce cyber attacks, through digital currency when we reach the $5 trillion economy status internationalisation of Indian rupee like US $ is likely to become a reality .