The government is all set to create a framework for creation of an official digital currency to be issued by the Reserve Bank of India (RBI). A Bill in this regard would be tabled in the Winter Session of Parliament.
The RBI has been studying various issues connected with the official digital currency from technological architecture to its usage in retail as well as wholesale level for a long time. Let's understand the real issues that would decide the future of official digital currency.
Issued by RBI and backed by the government or sovereign
The digital currency will be a legal currency issued by the RBI in a digital form. It will be backed by the government, with the seignorage accruing to the sovereign. A seignorage is the difference between the value of the currency and the cost of printing it. In fact, the government will earn higher seignorage in a digital currency as the transaction cost (as against printing of notes and coins) will be much lower. There will be no fluctuation in the value of digital currency as seen in crypto currencies.
Part of currency in circulation (CIC) in the economy
The total digital currency issued, also exchangeable with cash, would be a part of the CIC. The RBI controls the total CIC as it is a very important monetary variable. If the economy is growing at a higher rate, a higher amount of currency is required. In the last 5-6 years, the CIC, which includes banknotes and coins, has increased from Rs 16.63 lakh crore to Rs 28.60 lakh crore in 2020-21. A higher level of CIC also contributes to inflationary pressure if it goes unchecked. Therefore, the RBI acts as a monetary authority to strike a balance. In the cryptocurrency world, the RBI has no role in containing it.
To reduce high cash levels in the economy
Currently, cash is the preferred mode of payment in the Indian economy. The cash in the economy shot up to 14.7 per cent of GDP in 2020-21 as compared to 10-12 per cent. The presence of a huge unorganised sector has been a big factor for the high cash levels. If the official digital currency replaces cash in the system, the RBI as well as the government stand to benefit because of high cost of printing and distribution of cash in the country.
To check growth of crypto tokens emerging as an alternative to cash
The popularity of cryptocurrency is also a big threat to the RBI's function as an issuer of currency. Imagine cryptocurrencies becoming a preferred mode of transaction in the market for buying goods and services. This would pose a big threat to the RBI to control inflation as there will be no control over the quantum of currency. The digital currency can solve this problem.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today