Union Finance Minister Nirmala Sitharaman presented the 2022-23 Union budget to Parliament on Tuesday (February 1st).
In the budget speech, the finance minister announced that the Reserve Bank of India (RBI) will issue the digital currency of the central bank (CBDC).
The CBDC will be based on blockchain technology and is expected to boost India’s digital economy as well as create a cheaper currency management system.
In addition, the government will mobilize funds for green infrastructure projects by issuing sovereign green bonds next fiscal year.
Currently, the central government’s actual capital expenditure is estimated at Rs 10.68 billion for the 22-23 fiscal period, the finance minister said.
Last year, RBI had proposed amendments to the Reserve Bank of India Act, 1934, to allow it to launch a CBDC. The amendment would improve the scope of the definition of “banknote” to include the CBDC. It is the digital form of fiat currency, a legal tender currency, unlike other cryptocurrencies on the market.
The decision comes in the context of high demand for private cryptocurrencies, such as Bitcoin, in India that has penetrated not only metropolitan cities but also smaller cities; and the prospect of a “digital currency proxy war” in which CDRs from other countries such as China gain supremacy in other markets by introducing new-age financial products. As Britain and China are already in the process of launching their CBDCs.
The RBI digital currency can be a superior currency for trading with India’s strategic partners, thus reducing dependence on the dollar. Due to its digital form, CBDR will reduce the cost of cash management while allowing for real-time payments. As digitalization and financial inclusion progress, the CBDR will also allow the RBI to better control the money supply, thus increasing the effectiveness of monetary policy.
However, there is still confusion about the underlying technology, the validation mechanism, and the distribution architecture with respect to the CBDC. Cybersecurity and disintermediation of banks are other concerns.
In April 2018, RBI had announced a ban on cryptocurrency transactions for banks and other regulated entities after allegedly using digital currencies for fraud and criminal activity. However, in March 2020, the Supreme Court overturned the ban as unconstitutional.
The long-awaited cryptocurrency bill is unlikely to be introduced in the current session, as the government is said to want to hold more debates and reach a consensus on the regulatory framework.