BILLS OF CHANGE

The digital rupee offers a host of benefits, but there will be collateral damage

-  K. SUNIL THOMAS

The big takeaway from Union Budget 2022 was that India is set to launch its own digital currency. The proposed ‘digital rupee’, by all means, looks like a silver bullet aimed at slowing the cryptocurrency boom that has gripped Indian investors. It could, however, end up with significant collateral damage—bringing the banking system to its knees, no less.

“Central Bank Digital Currency (CBDC) could cause a shift away from bank deposits,” warned T. Rabi Sankar, deputy governor of the Reserve Bank of India. “Reduced dis-intermediation of banks carries its own risks. If banks begin to lose deposits over time… interest margin might come under stress, leading to an increase in the cost of credit.”

To put it in layman’s terms, a digital rupee that can be sent and received by private citizens through digital wallet apps loaded on their phones and guaranteed by the RBI would reduce the need to keep money in bank accounts or transact through them. If banks have less money in their accounts, they have less money to lend. That means loans would get more expensive, as the interest charged will be higher.

Of course, the real impact of the digital rupee still remains hard to predict, just like the ether on which it will move around in bits and bytes in a gloriously paperless, and uncertain, future. Much will depend on what shape and form it will finally make its debut in, with the RBI looking at various models that could offset the impact on banks.