Central Bank Digital Currency and its impact on the Indian Financial system

Abstract

Cash has been used as a means of exchange for a long time and has been changing its form from paper to paperless. It has been an effective tool in shaping the payment system and acts as an important pillar of the financial system. CBDC (Central Bank digital Currency) is a form of digital currency which is controlled by the country’s central bank and backed by the Government. With the rise of electronic payments and innovations in the financial sector has highlighted the lacking of the existing payments system. Role of central Bank has been questioned since the emergence of the crypto currency like Bitcoin in 2008.Moreover, the monetary authorities around the world are of the view that the society’s trust in the financial system is because of the Central Bank guardianship. There has been an increase in the number of Central banks around the globe from ~60% in 2017 to 80% in 2019 who are looking to come up with a CBDC as published in the report of Bank for International Settlements (BIS) (Todd & Rogers, 2020).The paper aims to study the implication of CBDC on the Indian Financial system.

Shaping the Future of Money: Public Perceptions on Central Bank Digital Currencies and the Digital Rupee

“…The paper recognizes the pervasive influence of digitalization on money and payment systems, signaling a fundamental shift in the way value is exchanged and transferred. (Kumar, 2021) the author explores the evolution of currency from physical cash to digital forms, framing central bank digital currency (CBDC) as a natural progression in the modernization of payment systems. This historical context provides the backdrop for an examination of CBDCs as a form of digital currency controlled by a country's central bank and backed by the government, positioning them as potential catalysts for further innovation and efficiency in the financial sector.…”

An Introduction to The Impact of India's Use of Central Bank Digital Currency on the International Financial System

“…In the study by Ozili, he pointed out that the risk faced by India in introducing CBDC as a basis for building a cross-border payment platform could be a shock to the country's banking operations [20]. The profitseeking nature of the capital markets could lead to an influx of capital and resources into the CBDC system, resulting in a lack of adequate funding for traditional banking operations [21]. In addition, the Indian banking market is characterized by numerous non-performing assets and corporate failures, which can lead to a weakened banking sector and the need for large amounts of capital to weather these problems [21].…”

“…The profitseeking nature of the capital markets could lead to an influx of capital and resources into the CBDC system, resulting in a lack of adequate funding for traditional banking operations [21]. In addition, the Indian banking market is characterized by numerous non-performing assets and corporate failures, which can lead to a weakened banking sector and the need for large amounts of capital to weather these problems [21]. Therefore, if the existing banking system cannot address these market issues effectively, consumers are more likely to invest in this stable financial product after the introduction of CBDC.…”