06 Dec 2022 Digital rupee or e-rupee
Significance for Prelims: Concept of Digital rupee or e-rupee
Significance for Mains: Benefits and risks associated with Digital rupee or e-rupee.
News: Reserve Bank of India(RBI) launched the digital rupee on a pilot basis. Initially selected group of public and private banks will offer digital currency in a few major cities. Digital currency can be used for both person-to-person and person-to-merchant transactions.
About digital rupee, a central bank digital currency issued by the RBI:
- It is similar to the physical cash, but e-rupee is held electronically in a digital wallet that is overseen by the RBI.
- RBI recognised digital rupee as legal tender . Now, it has to be accepted by everyone in the country as a medium of exchange.
- Difference between deposits and digital rupee: Deposits are paid interest, but digital rupees in wallets are not paid any interest by the central bank. Bank deposits can be converted into digital rupees and vice-versa.
Need for the digital rupee: The RBI aims to make the rupee more attractive as a currency than cryptocurrencies.
- Investors view cryptocurrencies as alternatives to fiat currencies, which progressively lose value over time due to debasement by central banks. Since such a trend could threaten their sovereignty, central banks develop their digital currencies.
- Other benefits of the digital rupee: (a) Production of the digital rupee is easier and more economical compared to physical cash notes. (b) Authorities can easily trace the transactions using digital rupees compared to physical transactions.
- Importance of digital rupee: It will help India’s transition towards a cashless society.
Risk associated with digital rupee:
- Central Bank will gain more power to supervise the economic activity.
- Digital currencies may deter economic growth if governments declare even legitimate economic activities as illegal.
- Exaggeration of the future impact of central bank digital currencies as an alternative to private cryptocurrencies: Private cryptocurrencies are popular among investors not because they are digital but because these currencies are better stores of value and more stable purchasing power than fiat currencies.
Impact of e-rupee on banking system: Potential to disrupt the banking system.
- With low-interest rates, people may convert their bank deposits into digital currencies. So cash holdings of banks would drop, and banks’ capacity to create loans would drop as the ability of banks to make loans is influenced by the amount of vault cash. The bank’s cash position determines its ability to expand its loan book while keeping bank run risk under control. Hence, increasing the usage of digital rupees would free banks from the need to maintain sufficient cash deposits before they expand their loan books. This is possible when digital rupee deposits become equivalent to other forms of virtual money, such as deposits created initially as loans by banks. In such cases, banks will be freed from the risk of bank runs which traditionally checked the unrestrained expansion of loan books.
Prelims:
Q. What is/are the most likely advantages of introducing ’e-rupee’ by the Reserve Bank of India (RBI)?
- It will protect the sovereignty of the country, as many investors are seeing cryptocurrencies as alternatives to fiat currencies.
- It will drastically reduce the ‘Current Account Deficit’ of India and will enable it to increase its foreign exchange reserves.
- It will enormously increase the growth and size of the economy of India and will enable it to overtake China in the near future.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Mains( 2016):
- Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing the unbanked to the institutional finance fold. Do you agree with this for financial inclusion of the poor section of the Indian society? Give arguments to justify your opinion
Source: The Hindu
Article: Explained | Why has the Reserve Bank of India introduced an e-rupee?
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