The Reserve Bank of India’s (RBI) decision to launch digital currency (e₹) or central bank digital currency (CBDC) is a bold attempt to combat the growing uncertainty around cryptocurrencies in India and to internationalize the country’s currency, says GlobalData, a leading data and analytics company.

India is following China, which is also testing its digital yuan. It will help reduce operational costs for cash management, lower settlement risk, and improve financial inclusion.

Cryptocurrencies, despite the lack of formal regulation, are increasingly challenging the traditional financial system. Also, many retail investors who have not been able to invest in cryptos see it as a missed opportunity. The RBI fears that the wider adoption of cryptos could prove to be a threat to the country’s financial stability. The development of a digital currency is a notable countermeasure to ensure progress and integrity.

Pinky Hiranandani, Principal Analyst in the Thematic Intelligence team at GlobalData, comments: “India spends heavily in printing physical currency and hence the digital currency will help curb some of the cost. A digital currency could be a cost-effective solution for cross border payments, as India is the largest recipient of remittances globally.

“India must ensure partial anonymity for the digital currency. China and the Bahamas are already following anonymity for lower tier transactions to achieve the same anonymity as cash. The degree of anonymity must be inclusive and responsive to the changes in the local market. Data protection and privacy concerns must also be addressed to ensure adoption.

“RBI must connect its digital currency to the existing digital payment modes, especially UPI, which is becoming more common in the country. Adding offline capability to the digital currency will also improve financial inclusion and adoption, even in areas with limited connectivity. The offline capability will also serve to differentiate the digital currency from the existing digital payment services.”