Reserve Bank of India: A CBDC could promote financial inclusion but also poses a risk of harming the banking system

In a report released Friday, it appears that the Reserve Bank of India (RBI) is viewing the central bank’s digital currency (CBDC) as a double-edged sword. One blade can promote integration into global finance, while the other can undermine the role of commercial banks in the economy.

Central Bank of India recognizes the pros and cons of a CBDC

The central bank side said:

“CBDC can be designed to promote non-anonymity at the individual level, monitor transactions, promote financial inclusion by direct benefit fiscal transfer, pumping central bank ‘helicopter money’ and even direct public consumption to a select basket of goods and services to increase aggregate demand and social welfare.”

CBDCs can indeed speed up money transfers to consumers but also drive inflation. According to the RBI, an interest-bearing CBDC improves the economy’s ability to respond to changes in policy rates and enhances monetary policy transmission.

In emerging markets with large-scale capital inflows, CBDC can act as a “wash-off” tool, alleviating the constraint caused by a finite amount of government securities on a bank’s balance sheet. center.

Even so, the RBI warned that CBDCs could lead to manipulation in the banking sector:

“CBDC is, however, not an unmixed blessing – it poses a risk of disintermediation of the banking system, more so if the commercial banking system is perceived to be fragile.”

The report from RBI stated:

“The public can convert their CASA (current account savings account) deposits with banks into CBDC, thereby raising the cost of bank-based financial intermediation with implications for growth and financial stability.”

As a result, banks may lose importance when the main channel through monetary policy is implemented. In simple terms, the public can hold a large amount of interest-bearing CBDCs, forcing commercial banks to increase deposit rates to retain customers. In return, banks will either have to tighten margins or have to charge higher interest rates on loans, as noted previously by the International Monetary Fund.

The RBI report also expressed concern about CBDC’s designs that promote anonymity, as they could aid money laundering and terrorism financing. Elsewhere, the Indian government is currently considering a bill that will facilitate CBDC development and ban anonymous cryptocurrencies.

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