India’s Digital Currency to Take ‘Very Calibrated, Graduated’ Approach, Says RBI Deputy Governor

T. Rabi Sankar, RBI Deputy Governor, spoke about India’s central bank digital currencies (CBDC) at an Indian Council for Research on International Economic Relations. PTI reported that he also discussed potential implications for India’s financial system, and its monetary policy.

The RBI will issue a digital currency central bank this financial year, Finance Minister Nirmala Sitharaman stated during her February budget speech. Prime Minister Narendra Modi stated that India’s digital rupee would be the digital version of the physical rupee. The RBI will regulate it. He stated that the digital rupee would revolutionize fintech.

When discussing different CBDC models Sankar stated that there were many uncertainties about which model would work and which design would be most effective in terms its impact on the banking sector, data privacy, and monetary policy. He stated:

My belief is that almost all central banks, and we are no exception, will likely go in for a careful and nuanced approach.

He stressed that central banks should “do no harm” when introducing new technologies and said that: “I think central bank would approach it in a very calibrated and graduated manner, assessing the impact all along, then making those connections to what is most needed.”

The RBI deputy governor continued to emphasize the benefits of issuing a virtual currency. These included cost, distributional and settlement efficiency. The digital rupee will reduce time and make transactions real-time, he stated.

He spoke out about how India’s central bank digital currencies might impact the Indian financial system. However, he warned that global experience was virtually non-existent on certain things such as [how] CBDCs might effect the banking system.

The CBDCs could have an impact on the Indian banking system’s transactional demand. He explained that CBDCs could negatively impact deposit creation and, consequently, the ability of the banking system to create credit. He concluded:

The average cost of transactions might rise if low-cost deposits are removed from the banking system. This would generally lead to some upward pressure on the price of funds within the system.

V. Anantha Nageswaran was the chief economic advisor of the Indian government and stated that the launch a CBDC would not eliminate the need to regulate cryptocurrencies within the country. They will still exist.

The RBI deputy governor also spoke out on stablecoins and warned that they could pose a greater threat to dollarization than cryptocurrency. He believes that cryptocurrencies cannot be used for small transactions because of their extreme volatility.

Indian officials are currently developing a framework to allow cryptocurrency. According to reports, Finance Ministry officials are consulting international organizations regarding the matter, including IMF and World Bank.

Currently, income from cryptocurrency is subject to a 30% tax without any loss offsets or deductions. Crypto transactions will be subject to a 11% tax at source (TDS).

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