Reserve Bank of India Deputy Governor T Rabi Sankar on Thursday said a nuanced and calibrated approach is essential for launch of India’s maiden digital currency as it would have various implications for the economy and monetary policy. RBI is planning to come out with a central bank backed digital currency using blockchain technology in 2022-23.

“Given the large number of uncertainties in terms of which model works, which design works well in terms of its impact on the banking system, on data privacy on monetary policy, I think almost all central banks and we are no exception will probably go in for a very careful and calibrated nuanced manner,” he said at an event organised by ICRIER.

The essential learning does not come from global experience but basically comes from your own experience, he said.

Observing that one of the principles for introduction of any technologies, especially for a central bank, is that it should “do no harm”, he said, “I think central banks would go about it in a very calibrated, graduated manner, assessing impact all along the line and then making those connections with what is most demanded.”

As far as India is concerned, he emphasised that RBI is looking at Central Bank Digital Currency (CBDC) as just as the digital form of paper currency and no distinction whatsoever.

Highlighting that CBDC would have cost and distributional efficiency, he said, the other motivation for introduction is settlement efficiency.

It will significantly bring down time taken for cross border transactions and make transaction real time, he said.

About the implications of CBDCs, he said, “while these motivations do exist, one must realise that global experience is virtually non-existent at this point in time on a few things like CBDCs might affect the banking system.”

CBDCs could affect the transactional demand for deposits in the banking system, he said.

“To the extent that happens, the deposit creation would get affected negatively and to that extent the ability to create credit by the banking system also goes down… to the extent low cost transactional deposits move away from the banking system, the average cost of deposits might go up, which generally would lead to slight upward pressure on the cost of funds in the system itself,” he said.

The other implication would be on monetary policy, he said, adding that surveys done by BIS and others seem to indicate that most central banks feel it will have an impact on monetary policy and impact on transmission.

With regard to stable coin, he said, it could emerge as much bigger threat to dollarisation than a cryptocurrency.

Stable coin is a kind of cryptocurrency backed by assets.

Cryptocurrencies are so volatile that it cannot be used for small value transactions, he said, citing the example of Tesla where it had announced that cryptocurrencies can be used for buying its cars. Later, the company withdrew the decision considering the volatility of cryptocurrencies.

Further, Shankar said that RBI and the Monetary Authority of Singapore (MAS) would soon link their respective fast payment systems.

Under this initiative, India’s home-grown payments system, the Unified Payments Interface (UPI), will be linked with Singapore’s PayNow.

The UPI-PayNow linkage will enable users of each of the two fast payment systems to make instant, low-cost fund transfers on a reciprocal basis without a need to get onboarded onto the other payment system.

Speaking during the event Chief Economic Adviser V Anantha Nageswaran said even the launch of CBDC will not obviate the need to regulate cryptocurrency as they will continue to exist.

Finance Minister Nirmala Sitharaman, in her Budget speech on February 1, had announced that digital rupee or CBDC would be issued by the RBI in the coming fiscal year.

She had also announced the government will levy 30 per cent tax on gains made from any other private digital assets from April 1.