December , 2022
22:47 pm

Dr. Rajiv Khosla

November 1 witnessed India’s central bank launching the digital currency (Rupee) in the wholesale segment. In simple terms, the use of Rupee in electronic form instead of its physical form is termed as Digital Rupee. For experimentation purpose, only nine banks – Bank of Baroda, State Bank of India, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, YES Bank, IDFC First Bank, and HSBC – have been initially approved by the government for buying and selling securities using Digital Rupee.

It is not that India is the first or the only country in the world where digital currency is being experimented. Atlantic Council, an independent organization based in Washington DC reported that as of March this year, 87 countries were considering the testing of digital currencies and nine countries – Bahamas, Nigeria & seven countries of the Eastern Caribbean Union – have already rolled out their central bank digital currency. Of course, by permitting the use of digital currency in the wholesale segment, India has figured among few major countries of the world which are testing digital currencies.

As of now, by taking a considerable lead in developing digital currency, China remained a leader among major countries of the world. In June 2021, by way of lotteries, China innovated a unique way to conduct trials of its Digital Yuan. The local government in Beijing, the capital of China, issued a notice on a government website offering the general public a proposal to participate in a special type of lottery, according to which 200,000 winners were to receive 200 Digital Yuan (about $31.50) each, through an app. Further, the winners had to spend the prize money at designated merchants around the capital Beijing by June 20. In this manner, the innocent public did not even get to know how the Chinese government successfully tested the Digital Yuan through them. Contrary, the Indian government and central bank chose to test the Digital Rupee on a wholesale basis through banks.

How will Digital Rupee work?

 So far, India is relying on a two-tier currency system. In the first stage, the central bank (which has a power to print money), reduces or increases the flow of money through banks. In the second phase, banks offer its account holders the facility to deposit or withdraw money. Over the past few years, we have seen different sources of money deposition and payment cropping up viz. debit and credit cards, online and UPI payments, etc. However, all these electronic facilities are provided to us by the banks or financial technology companies known as FinTech like PayTM, Phone Pe, Google Pay, etc. In a nutshell, banks have given its customers the option to deposit or withdraw money from the bank in hard cash and then spend it or to make payments through alternate electronic facilities. Introduction of digital Rupee is likely to eliminate the option of depositing and withdrawing money from the account. Alternatively, deposition or payment will be made either by scanning of barcodes through an electronic device (such as a mobile phone) or using mobile apps.

Central banks are strongly in favour of the early implementation and usage of digital currency under the belief that it will usher in multiple benefits. These benefits include keeping at bay many communicable diseases which get transferred with the exchanging of notes from one person to another. Further, the chances of mutilation of paper currency also decimate with the advent of digital currency. It is anticipated that digital currency will help to control the increasing number of transactions taking place through FinTech companies like Paytm, Phone Pe, Google Pay etc. Beside this, the flow of counterfeit currency will automatically get checked and the cost of printing too will be saved. It is worth mentioning that during the year 2021-22, Reserve Bank of India spent nearly `4,985 crore on the printing of notes. The cost of printing stood at `7965 crore in 2016-17 when demonetization of `500 and `1000 notes took place. A brief of the amount spent on the printing of currency notes in past few years is given in table 1.

Table 1

Cost of Printing Currency

(in Rs. Crore)


Cost of Printing

Notes issued



















Source: RBI Annual Reports

Impact on banks

 According to the traditional model of banking (which is almost two centuries old), banks are the intermediaries between the depositors and borrowers. Banks earn profits from the difference in the interest rate that is received from the borrowers and paid to the depositors. Hitherto, entire banking hinges upon increasing the level of credit in the system. When a bank disburses a loan, the borrower deposits the amount in his account, which is then treated as a new deposit and is lent out again keeping aside the mandated reserve to be kept by the bank. This process is repeated many times in a system. Hypothetically, a deposit of `100 crore is capable of giving loans of `1000 crore in 10 rounds of loans. Of course, this multiplier effect boosts economic growth; yet, the risk of non-repayment of loans cannot be negated. At any stage during the 10 rounds of loan disbursal, a default may take place causing a catastrophic economic downturn in the economy.

With digital currency in vogue, the role of banks, particularly for the depositors will get greatly reduced because digital currency will be issued directly by the central bank. This will accordingly reduce the financial risks created due to the lending. In addition to this, digital currency being fully electronic, there is a bright possibility that money spent and in possession with every citizen can be tracked easily by the central bank. Due to the mighty monopoly power of the central bank, there is certainly a fear of denial of payment of interest to the depositors in the future. By cutting down the costs, government and central banks can drastically reduce their expenses

From this discussion, it becomes clear that the power of commercial banks to generate credit through a multiplier effect will almost decimate. In this event, banks would not even need to secure the depositors amount (upto `5 Lakh now) through insurance arrangements. Digital currency issued by the central bank will have a unique and an absolute digital identity and will also be a direct liability of the central bank. The expansion of Digital Currency will open new vistas for the Fintech companies in future that will try to attract savers and borrowers by floating the innovative schemes. Current established model of depositing cash in banks for security reasons or to earn interest may lose its continuation.

Difference between Digital Currency and Crypto

There is no doubt that digital currency will also use the same blockchain technology on which crypto functions, but there are fundamental differences between digital currency and crypto. Where digital currency is a substitute for physical currency and controlled by the central bank, crypto remains an anonymous venture of the private parties which sans control by any government or the bank. Investment in crypto is feared to be used as a medium of betting or hiding black money, since the information related to transactions is not shared with anyone. In nutshell, digital currency is a legitimate currency held in the bank accounts, whereas crypto is apprehended to be a haven for hiding illicit operations.

 The above discussion thus makes it aptly clear that digital rupee is the currency of the future that can usher a new financial revolution. However, there are few such challenges that need to be addressed before the digital rupee is launched for the general public at large. The first risk pertains to privacy. Our technologies need to be so fool proof that the personal information of the digital currency user is not compromised at any stage. Not only at the personal level, rather at the central bank level too, necessary security mechanisms need to be invoked to ensure that no security breach takes place. Violation of safety walls at the level of the central bank can be catastrophic. Last but not the least, until the devices that glide digital currency reach everyone, the central bank should start educating people about it to keep the divide between the rich and the poor minimal. Unless and until these basic issues are addressed comprehensively, efforts to introduce digital rupee may remain a failed experiment.




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