New Delhi: The Reserve Bank of India (RBI), currently running a pilot for the country’s central bank digital currency (CBDC), is looking to collaborate with the US and the European Union before deciding on a full-scale rollout of the digital rupee in the coming years, two people aware of the matter said.
The country is also set to extend its partnership with the United Arab Emirates (UAE) for the cross-border pilot of CBDC by a year or two, the people said on the condition of anonymity. The agreement, signed in November 2022, focuses on the use of the digital rupee for remittances and trade.
India’s CBDC pilot boasts over five million users and involves 16 participating banks. The nation is looking to leverage the growing interest in digital currencies for domestic and international economic engagement to reduce transaction costs and boost the rupee’s status as a global currency. CBDC, unlike unregulated and decentralized digital tokens like bitcoin, is backed by the RBI-regulated fiat currency.
“We want to join international platforms to better understand how CBDC will function,” said the first person quoted earlier. “If the UK, US, and the European Union show interest and more global cases emerge, it will help solidify the role of digital currency.”
“CBDC has great potential domestically, but it’s also an excellent tool for cross-border financial settlements as we are currently conducting a pilot with the UAE,” the person said. “It holds immense potential and could become one of the most significant instruments for payments.”
But there is no immediate rush for a full-scale launch, with the digital rupee’s widespread rollout still a few years away, the people quoted earlier said.
“The CBDC rollout will take time. There’s no hurry. First, we need to establish useful use cases and understand how the economy responds to them,” the second person mentioned above said. “We won’t launch until we fully understand the product. We need to collaborate with larger economies to see how it works.”
Harmonization of standards vital
RBI governor Shaktikanta Das, too, recently said the harmonization of standards and interoperability would be important for CBDCs for cross-border payments and to overcome the serious financial stability concerns associated with cryptocurrencies.
“We deliberately want to go slow, first learning how it’s used. Once that’s established, CBDC will become an attractive product to launch,” the first person quoted earlier said.
Based on insights gained from these partnerships, the RBI will “approach the government to consider putting laws in place to address privacy concerns related to digital currency”, the person added.
Spokespersons for the RBI and the finance ministry didn’t respond to emailed queries.
While push for CBDC is aimed at reducing the physical circulation of currency on the domestic front, it’s international acceptance would help make the Indian rupee a hard currency over time, like the US dollar, the Japanese yen, the British pound, the euro, and China’s yuan–all of which are used to settle trade globally.
“Today, If I am holding US dollars, I can exchange them in any part of the world, which is not the case with the Indian rupee,” said Madan Sabnavis, chief economist at Bank of Baroda. “Lots of negotiations will have to be done with other countries (for internationalising the rupee).”
The Indian rupee is not part of the global basket and unless “we reach there, the Indian rupee will not be accepted globally”, he said. “Seeking partnerships with large economies is the right way forward in this process.”