RBI weighs the pros and cons of a CBDC

The launch of a national digital currency (CBDC) could broaden access to financial services, but may undermine the role of lending institutions. This is according to a new RBI study.

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According to RBI officials, the CBDC design contemplates no user anonymity, transaction monitoring, and financial inclusion through the option of direct helicopter-money payments. The latter could lift aggregate demand in the economy and be seen as a means of supporting the population.

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“Helicopter money”: a remedy for a crisis or another misconception of the traditional school of economics

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CBDCs with interest payments could improve the economy’s responsiveness to changes in monetary policy, RBI said.

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According to the study, in developing markets with substantial foreign capital inflows, national digital currencies can play a “sterilising” role. It involves neutralising the consequences of the limited capacity of the domestic government bond market.

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Analysts say CBDC could also reduce the role of financial intermediaries in transmitting monetary policy.

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“Households could convert deposits in fiat into CBDC, thereby raising funding costs. This would affect economic growth and financial stability [banks would be forced to either raise lending rates or curb their lending],” the analysts noted. — noted the analysts.

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The central bank’s analysts noted the risks of money laundering and terrorist financing if the CBDC project envisages some form of anonymity.

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In January, the RBI began the study of the potential of the digital rupee.

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During the upcoming budget session, the parliament will consider the government-proposed bill to ban digital assets. Authorities have promised that the transition will be gradual.

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