Rupee to go digital: What Budget's CBDC move signals (2024)

Finance Minister Nirmala Sitharaman in her fourth budget speech announced that the Reserve Bank of India (RBI) will issue India’s own digital Rupee in Financial Year 2022-23. The digital Rupee is popularly known as Central Bank Digital Currency (CBDC). CBDC is the digital form of fiat currency that can be transacted using wallets based on blockchain technology and in the Indian context, it will be regulated by the RBI.

Issuance of Indian Rupee in the digital format by RBI means it will have the status of legal tender as it is different from a decentralized private virtual currency. The use of blockchain technology for issuance of Indian Rupee in digital format will mean records cannot be changed thereby retaining transparency and authenticity of the ledger. With CBDC, every Indian Rupee issued in electronic form will likely have a unique serial number to identify it.

The introduction of Indian Rupee in digital format also signals a shift away from private virtual currency, also known as cryptocurrency. Private virtual currencies unlike fiat currency do not represent any person’s debt or liability. With sovereign backing, the Indian Rupee in circulation in digital format will appear as liability on the balance sheet of RBI. It will be the same as fiat currency and will be exchangeable one-to-one with fiat currency. Thus, public will be protected from abnormal levels of volatility that they otherwise experience with private virtual currencies.

As per 2021 BIS survey of central banks, 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. One key aspect for such high levels of interest in CBDC could be attributed to increasing public interest in digital currencies. The issuance of Indian Rupee in digital format will help avoid several issues otherwise posed by virtual private currencies. Further, CBDCs have a clear advantage over digital payment systems as they enable a more real time global payment system without the need for an intermediary bank, provided both countries in the transaction have CBDCs in place.

As per a pilot survey conducted by RBI, cash remains the preferred mode of payment especially for small value transactions and also given the anonymity it offers. In this context and given the overall thrust in digitization and financial inclusion in each successive budget, it remains to be seen how long the Indian Rupee in digital format will take to replace cash usage. Overall, the Indian Rupee in digital format will surely provide the much-needed fillip to digital economy, reduce leakages and reduce dependency on cash in the long run.

While the Cryptocurrency bill is yet to be issued, the Finance Minister announced a flat tax rate of 30% for any income from transfer of digital assets. This will impact gains from cryptocurrency and Non-Fungible Tokens (NFTs). Also, TDS of 1% has been introduced to track transactions in crypto assets. This does indicate a possible blanket ban on cryptocurrency transactions may be an unlikely outcome and that cryptos maybe accorded the status of an asset.

Rajosik Banerjee is Partner and Head, Financial Risk Management, KPMG in India and Narayanan Venkateshwaran is Partner, Financial Risk Management, KPMG in India.

In Video: Budget 2022: Proposed to introduce Digital Rupee by RBI using blockchain technology in FY 22-23, says FM

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