Published Paper Details:

The rise of financial technology (fintech) is revolutionizing the financial sector, and Central Bank Digital Currencies (CBDCs) are a significant aspect of this transformation. A Central Bank Digital Currency (CBDC) is a digital version of legal tender issued by a central bank. It holds the same value as traditional fiat currency and can be exchanged on a one-to-one basis with it. The key distinction lies in its digital form.1 This paper explores the rationale for India adopting a CBDC, discusses various design considerations, evaluates potential impacts, and provides an update on the current status of CBDC in India. The Reserve Bank of India (RBI) is considering CBDC issuance due to several factors: reducing cash management costs, enhancing financial inclusion, increasing transaction efficiency, and promoting security and stability. Key design choices include determining the type of CBDC (wholesale vs. retail), the issuance and management model (direct vs. indirect), the form of CBDC (token-based vs. account-based), the interest-bearing nature of CBDC, and the level of user anonymity. The potential impacts of CBDC on the Indian economy and financial system are multifaceted. CBDCs could disrupt traditional banking by reducing bank deposits but also foster competition and innovation. They could enhance the RBI's control over monetary policy while introducing cybersecurity risks. Additionally, CBDCs could integrate the informal economy, streamline cross-border payments, and boost financial inclusion. The RBI's ongoing pilot programs for CBDC, initiated in 2022, have shown promising results, with significant involvement from major banks and an expanding scope. The proposed expansion to include non-bank payment service providers aims to increase accessibility, offer more choices, and test the system's resilience. This initiative aligns with the RBI's focus on creating a robust digital payment ecosystem. In conclusion, while CBDCs offer substantial opportunities, they also pose challenges. India's proactive approach in developing and testing CBDCs is crucial to ensure it does not lag in this fintech evolution. Continued research, collaboration, and public participation are essential to successfully implement CBDCs and leverage their benefits for the Indian economy.