Meanwhile, The U.S. Federal Reserve Unveiled The Possible Effects Of CBDC On The Monetary Policy

India is becoming increasingly aware of the crypto sector, as the nation’s Reserve Bank (RBI) highlighted the importance of launching a CBDC project and disclosed that it would be among the top priorities in 2022 and 2023.

The RBI published its annual report recently, which highlighted that a possible CBDC introduction will consist of three distinct phases: a proof-of-concept, pilot, and launch.

“The Reserve Bank is engaged in the introduction of a central bank digital currency (CBDC) in India. The Reserve Bank proposes to adopt a graded approach to [the] introduction of CBDC, going step by step through stages of Proof-of-Concept, pilots, and the launch.” the bank noted in its report.

However, in order to successfully test, launch, and adopt the so-called digital rupee, it needs to be in conformity with the stated objectives of monetary policy, financial stability, and efficient operations of currency and payment systems.

According to the report, CBDC development falls in line with other RBI initiatives, all under the 2022-2023 agenda, and under the supervision of the Reserve Bank Innovation Hub.

India’s road to cryptos

The last few months have been setting the foundations of what it may be the first major economy to undergo a crypto transformation, as back in February India’s Ministry of Finance gave the “thumbs up” to such a project, but also introduced a 30% tax rate on all virtual digital assets (VDAs). Also, the financial institution prepared for introducing a crypto bill, which would regulate almost all of the aspects when it comes to crypto assets.

But, in order to place the crypto legislation in an effective manner, India first had to amend the RBI Act of 1934 to give the legal framework for introducing a CBDC.

The end of private digital currencies in India?

As expected, a move towards creating a nationwide CBDC met opinions on both sides of the spectrum, as many raised a voice of concern about whether or not India would shut its doors to cryptos like Bitcoin, for example.

Most of the concerns come in a reply to RBI’s statement that India’s economy should be dollarized, since it already processes most of the transactions denominated in U.S. dollars, which could lead to capital leaving the country, especially towards foreign entities.

The fears of private crypto bans were also fueled by RBI’s governor Shaktikanta Das, who noted that digital currencies have no real value, and without crypto regulations, using cryptos may turn out to be a cause for undermining India’s “monetary, financial, and macroeconomic stability.”

U.S. Fed evaluates retail CBDCs

India’s dependence on the U.S. dollar may be beneficial for the U.S. Federal Reserve, as the financial watchdog published a working paper, titled “Retail CBDC and U.S. Monetary Policy Implementation: A Stylized Balance Sheet Analysis.”

According to the research, there are four main scenarios for using CBDC projects in the near future. The first one is aiming at illustrating fiat-to-CBDC exchanging, which affected the categorization of assets at the Fed and in the household involved but had no effects on policy implementation.

The other three scenarios, however, were closely tied to the usage of CBDCs, as individuals may want to withdraw CBDCs in a cash-backed commercial bank.

If CBDC withdrawals intensify, banks have the choice of either offloading loans and securities for cash, or increasing short-term deposit rates, in order to bring more cash in. If the withdrawal rate is abrupt, the Fed can moderate the rates by facilitating standing repo deals or to place reserve management orders.

“The potential effects on monetary policy implementation from a retail CBDC are highly dependent on the initial conditions of the Federal Reserve’s balance sheet.” the Federal Reserve noted, highlighting that it has all the tools available to manage a retail CBDC implementation.

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