As the Reserve Bank of India (RBI) plans to take on decentralised financial sector with the roll-out of its own digital currency, it is believed that businesses across industries will benefit from the same. The RBI has proposed a three-step graded approach for its implementation, In a conversation with FE Blockchain Nikhil Kurhe, CEO, Finarkein Analytics, a data analytics platform talks about how the digital rupee can be a game changer. (Edited Excerpts)
How CBDC will help to boost the Indian economy?
Most banks are likely to benefit from CBDC adoption by gaining more clients and expanding their outreach to previously unbanked and underbanked populations with proper digital innovation and infrastructure changes. The cost structure for interbank settlement does marginally improve with CBDC. To really stoke the economy though, India has to consider the demand factors such as the demand shapes for white goods, services, and agricultural products. The Indian retail payment ecosystem is already mature with public digital goods like unified payments interface (UPI), and national electronic fund transfer (NEFT) among others. However, the business-to-business (B2B) use cases for CBDC can perhaps unlock incremental value for intermediaries. The current draft proposal for CBDC falls short of ambition on a few fronts and is somewhat conservative.
How does the introduction of the digital rupee impact inflation?
The current global model with the United States dollar (USD) as the reserve currency enables the US economy to export its local inflation essentially to emerging and international markets. Given the current document the RBI has put out around our CBDC efforts and the fact that our inflation is primarily driven by local factors, inflation will not have a direct effect via CBDC. Inflation and the associated causes are more orthogonal in nature vis-a-vis CBDC. However, should the CBDC scope be increased to cross-border trade settlement, the demand for the digital rupee can make a measurable dent in inflation.
The US dollar versus Digital Rupee – what is the scope of competition?
The demand for dollars and the pain global emerging markets are experiencing due to rising interest rates from the US Federal Reserve will persist even with a successful digital rupee. Unless we have trade settlements in different currencies and alternative reserve currencies emerge I do not foresee how the digital rupee challenges the role the US dollar plays in the global economy.
How CBDCs can adversely impact the banking system?
Central Banks are not in the business of banking, they have a specific mandate to ensure economic and financial stability. They are in the business of conducting monetary policy mandates, ideally to achieve low and stable inflation. In the wake of the recent global events including supply chain pain, inflation, the commodity supercycle, and the Ukraine war, Central Banks have used an array of conventional and unconventional tools like CBDCs to achieve their mandate. Ultimately, if CBDCs lead to more efficiencies in the banking system, then the current banking system will have to evolve with these efficiencies and strive to deliver better value to all stakeholders for their continued existence.
What is the role of blockchain here?
A blockchain is a form of distributed ledger technology (DLT) that acts as a decentralised database managed by multiple participants. Transactions are recorded with an immutable cryptographic signature, which is then grouped as a block. Each block also contains the previous block’s signature, hence creating a chain of references, and the term blockchain. In any multiparty system, a consistent state has to be maintained across all participants. For example, if the central bank’s ledger indicates that a bank has parked a certain amount with them, the bank’s ledger also has to indicate the same value. This creates a lot of complexity very quickly as soon as you have multiple parties, with multiple transaction types and multiparty settlements involved.