Moreover, the quality and availability of banking services is disparate, especially with large swathes of the rural population still having to rely on cash or informal-sector borrowings for a variety of transactions, including mortgages. The RBI’s own annual financial inclusion index for India corroborates this.
The ‘quality’ sub-index shows the regional disparity in credit outstanding was most prominent with the Gini coefficient at 0.72 in 2021 (Gini value of 1 means complete inequality), followed by disparity in the deposit amount with the Gini coefficient of 0.58. It is possible this problem of under-banking and disparity in availability of quality financial services will ease under a retail CBDC model.
One of the other key benefits of CBDCs is an improvement in the targeted disbursement of social benefits, including subsidies. With CBDCs, not only can the reach of social benefits be extended to a larger number of beneficiaries but it can also be ensured the subsidy is available for specific purposes only, minimising leakages. For example, a pre-programmed CBDC can be issued specifically for purchasing cooking gas to low-income households. This type of CBDC will be accepted only at a cooking gas selling outlet who can then exchange it into a general purpose CBDC. The same goes for food or fertiliser subsidies.
This is a key positive aspect in the Indian context, where subsidy leakage or diversion of subsidy resources to unintended purposes is a huge policy concern. For example, India spends roughly 2 per cent of gross domestic product on energy subsidies, such as for kerosene and cooking fuel, where the leakages are to the tune of 10-40 per cent.
A ‘no-CBDC’ scenario
While cryptocurrencies in their current avatar may not deliver the benefits possible with CBDCs, it is a growing possibility they may evolve into a high-volume payment mechanism over time.
Stablecoins have been a remarkable addition to the crypto universe. Their prominence will undermine the central bank’s monopoly over currency issuance and management, a phenomenon that will in theory be akin to currency substitution or dollarisation of the economy. In such an event, it will impair the RBI’s ability to manage inflation and affect counter-cyclical policies.
Even if crypto currencies are not used for payments, they can become a ‘store of value’ in periods of economic and financial stress. For instance, there have been anecdotal reports of a surge in the use of cryptocurrencies in Turkey during the recent episode of surging inflation and depreciating Lira.
Central banks are aware of this growing threat. India’s government, along with some others like Malaysia and Thailand, has made payments through cryptocurrencies illegal - although it is not clear how this can be monitored given anonymity in their usage. Additionally, the RBI has imposed a 30 per cent capital gains tax on crypto transactions.
To be sure, even though the e-Rupee may not be able to fully resolve these issues as its character will skew towards ‘medium of exchange’, it can help mitigate them to some extent.
On the surface, while it may appear there will be negligible impact from the digital rupee as it will merely replace the conventional rupee, the nuances are more involved. There could be both positive and negative ramifications of this transition.
On the positive side, especially under a retail CBDC model, monetary policy transmission will likely improve and be much less lagged. Banking sector competition and market efficiency will improve, lowering the cost for good borrowers.
On the negative side, there could be significant adjustment costs for the banking sector, which may see a relegation of their role as financial intermediaries. A fall in deposits could mean a decline in the credit multiplier, warranting liquidity infusion by the central bank.
Although the variant of the e-Rupee, the underlying technology (blockchain or another) and the operational parameters are far from crystallised, its advent seems inevitable. The competition from decentralised currencies will simply become too big to ignore.
ANZ Research sees several benefits of a retail e-Rupee including improving access and quality of financial services, enhancing fiscal transfers and potentially improving policy transmission. At the same time, the role of India’s banks will need to be redefined. The RBI Act, 1934 will also need to be modified if the RBI were to adopt the retail e-Rupee model and accept deposits from the public.
Given the ‘unknowns’ at this juncture, ANZ Research’s views will be updated as progress is seen from the RBI on this front.
Sanjay Mathur is Chief Economist Southeast Asia & India and Dhiraj Nim is Economist & FX Strategist at ANZ