This may be the case with central bank digital currency (CBDC). Announced in Nirmala Sitharaman‘s 2022 budget speech to bolster the unfounded belief that private virtual currencies (PVCs) like bitcoin, upon which an unpopular tax was levied, posed a threat that only a CBDC could counter, RBI was forced to railroad this project into the list of commercial bank priorities, and public consciousness.
Had it been possible to rectify the misconception of its eminence grise, e₹ might never have been. After all, the capital gains tax on the sale of PVCs showed that GoI treated them as speculative assets rather than as competitive currencies. In any case, bitcoin did not threaten rupee transactions.
But sovereign proclamations trump fact, common sense and regulator autonomy. Thus, wholesale and retail versions of e₹ (e₹-W and e₹-R) were duly launched at end-2022. Since then, the hunt for opportunity has yielded less than stellar results.
According to RBI deputy governor T Rabi Sankar in 2021, CBDC-W could facilitate a real-time and cost-effective international settlement system in which settlement risk would disappear, along with the need for interbank settlement. Then, after launch, e₹-W focused on delivering domestic cost-effective secondary market transactions in G-Secs. But these were both over-engineered arguments, which took no cognisance, in the first instance, of settlement fees that are part and parcel of bank earnings and, in the second, of existing digital reserves, which made e₹-W superfluous.
Unsurprisingly, there were few takers. Offered by 16 participating banks, total holding of e₹ stood at a mere ₹8 lakh on March 31.Separately, e₹-R was meant to provide a frictionless way to spread benefits of a formal economy nationwide: by authenticating income and spending patterns; by curtailing misallocation and misappropriation of funds by criminals; and by making sure that payments and subsidies could be programmed for appropriate use.This April, IndusInd Bank announced the first successful execution of RBI’s programmable e₹ pilot. New use-case categories quickly followed that included fuel, grocery, education, restaurants, medical expenses and travel, allowing individuals to programme the digital rupee for a specific purpose, location and duration.
For example, a user can now choose to transfer a specific amount to a family member for, say, a restaurant meal, while assigning an expiry date to this transaction. All this, despite bank payments via UPI could – and, in many instances, do – accomplish the same. As things stand, e₹-R grew from ₹6 cr to ₹234 cr in FY24. Two factors may trivialise this growth rate:
- RBI forced participating banks to issue and maintain at least ₹10 cr of e₹-R each.
- As of June, 5 mn customers were each holding, on average, less than ₹450 of e₹-R.
So, does India really need a non-interest-bearing sovereign digital currency in a bank account to compete with, and confuse, users of a successful interbank payment rail (UPI), which has already accomplished digitalisation at scale?
On Aug 30, at the Global Fintech Fest, Shaktikanta Das admitted that there should be ‘no rush to roll out system-wide CBDC before there is a comprehensive understanding’. Then, on Oct 14, he produced the old cryptocurrency bogey while extolling CBDC’s ability to ‘facilitate efficient cross-border payments‘. This ambivalence is confusing.
Many central banks – such as in Sweden, Australia and Canada – have suspended their CBDC pilots, citing lack of ‘a clear public interest case’. Even IMF confirms that, once launched, digital currency is unlikely to be adopted at scale. Furthermore, ‘CBDC presents a potential threat to the traditional business models of existing financial institutions, particularly in deposits and loans’ that could ‘make intermediaries reluctant to engage with and support CBDC activities’.
These same central banks have now decided to protect their sovereign currencies by promoting currency notes, going so far as to overturn earlier efforts to create digital societies, or by threatening new bank regulations to ensure that consumers and businesses can access and accept cash.
In India, too, there may be hope. Information relating to e₹ has been periodically broadcast by Das or his RBI deputies. Since its introduction, progress related to e₹ has made a brief appearance in only two of the 12 post-MPC meeting statements. Moreover, the recent 77-page EoI by RBI to automate, even robotise, physical currency management infra may point to the fact that CBDC has begun to languish in ‘compliance’ mode, before meeting a bureaucratic end.
Ultimately, it’s pointless to persevere when no opportunity exists. Nov 1 will mark the second anniversary of e₹’s launch. RBI should resign honourably before it’s checkmated. There’s no shame in that.