![When RBI's MPC needs to control inflation in the country, it decides to increase the repo rate, which is called monetary tightening. When RBI's MPC needs to control inflation in the country, it decides to increase the repo rate, which is called monetary tightening.](https://images.news18.com/ibnlive/uploads/2021/07/1627283897_news18_logo-1200x800.jpg?impolicy=website&width=510&height=383)
When RBI's MPC needs to control inflation in the country, it decides to increase the repo rate, which is called monetary tightening.
Central banks are trying to set a precise balance for proposed CBDCs, keeping in mind a variety of considerations, according to experts.
India's first central bank digital currency (CBDC) requires a 'nuanced' and 'coordinated' approach, Reserve Bank of India Deputy Governor T Rabi Sankar said. A senior RBI official said this was essential as the new currency would have various implications for the economy and monetary policy. RBI plans to launch its own CBDC by 2022-23 using blockchain technology.
“Given the many uncertainties about the impact on the banking system, what models will work in terms of data privacy in monetary policy, and what designs will work well, almost all central banks and we will be no exception. For a very careful, coordinated and nuanced way,” he said at an event hosted by ICRIER on Thursday.
“I think central banks will introduce technology in a very calibrated and gradual way and assess the impact,” he said, noting that one of the principles of any technology introduction, especially for central banks, is “do no harm.” It’s all about connecting with what’s most needed through the process.”
On the implications of CBDCs, he said: “The motivation is there, but we have to realize that there is virtually no global experience at this point in terms of how some things like CBDCs might impact the banking system.” CBDCs could impact demand for deposit transactions in the banking system, he said.
“When this happens, it has a negative impact on deposit creation and therefore the banking system’s ability to create credit. “To the extent that low-cost transactional deposits move away from the banking system, the average cost of deposits may rise, which may generally put some upward pressure on the cost of funds in the system itself,” he said.
Commenting on the RBI deputy governor's remarks on CBDCs, Harish Prasad, head of banking at FIS, said it is clear that the central bank is trying to set an appropriate balance for the proposed CBDCs, keeping in mind various considerations.
“Foremost among these are the risks that CBDCs may pose when requiring deposits within today’s banking system. That is, if people prefer to hold CBDCs rather than hold demand deposits in banks. This could have far-reaching implications for the functioning of the banking system and the cost of funds, and it is important that this does not end as a result of the proposed CBDC. It has been reiterated that holding funds in the form of the proposed CBDC does not accrue any interest to the holder and this addresses this risk to some extent,” he said.
“The Lieutenant Governor’s statement also highlights some of the key drivers of CBDC in India. There has long been a well-known need to reduce physical currency levels to increase efficiency and lower costs associated with managing national currencies, Prasad added.
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