The Reserve Bank of India (RBI) will introduce a digital rupee in the next financial year beginning April 2022 subsequent to amendments proposed in the Finance Bill, 2022. The Union Budget for 2022-23 made a string of other announcements on digital payments, including a plan to offer netbanking to depositors with India Post and another to set up 75 digital banking units across as many districts. The government also intends to tax transfer of ‘digital assets’, widely interpreted as cryptocurrencies, at 30%.
Finance minister Nirmala Sitharaman said in the Budget speech that the introduction of a central bank digital currency (CBDC) will give a big boost to the digital economy.
“Digital currency will also lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce digital rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23,” the finance minister said.
The Finance Bill, 2022 proposes amending the RBI Act, 1934 to modify the definition of a bank note to cover digital notes issued by the central bank.
RBI officials have earlier said much progress has already been made on a wholesale account-based CBDC, while a retail CBDC is likely to take longer. Depending on which is ready first, the central bank plans to release digital currencies for a pilot.
Most industry players lauded the announcements aimed at deeper digitisation. Harish Prasad, head of banking, India, FIS, said they will trigger preparatory activity in the industry to offer payment mechanisms using the digital rupee.
“Another effect of this in the slightly longer term could be that the dependence on UPI (Unified Payments Interface) for small value payments could potentially reduce with the digital rupee gaining traction in time,” Prasad said.
“Given the level of growth being seen on UPI and the associated stress on technology infrastructures of issuers and banks, this may be a good thing after all,” Prasad added.
Others expressed doubts about the efficacy of a digital rupee in increasing financial inclusion. Mahesh Makhija, technology consulting leader, EY India, said India’s consumer payments system is already world-class and many transactions have moved away from cash to mobile payments.
“It is not easy to see how a CBDC can increase financial inclusion – beyond current modes enabled with Jan Dhan, Aadhaar and mobile payments. In fact, any blockchain based system will need to solve for the classic trade-offs between decentralisation, security and scalability,” Makhija said. Both Prasad and Makhija observed that the planning behind the digital rupee needs to be closely linked to the growth of the Web3 and creator economies, which consider crypto as an exchange of value.