In a significant move towards digitizing the nation’s financial infrastructure, the Reserve Bank of India (RBI) has initiated a pilot program for its wholesale Central Bank Digital Currency (CBDC) in the call money market.
This initiative is seen as a pivotal step in India’s journey towards embracing digital currencies and integrating them into its financial ecosystem.
The RBI’s decision to test the CBDC in the call money market is strategic. The call money market, an essential segment of the Indian financial system, deals with day-to-day interbank lending. By introducing the CBDC into this space, the RBI aims to streamline operations and enhance the efficiency of short-term borrowing and lending between banks.
Ajay Kumar Choudhary, the central bank’s Executive Director, confirmed the developments during a recent address at the RBI’s Innovation Pavillion at the G20 Leaders’ Summit venue.
He mentioned, “We are going to start the pilot on wholesale CBDC use in interbank borrowing this month or early next month.” This move follows the RBI’s pilot for the wholesale CBDC in November 2022, which was aimed at the settlement of secondary market transactions in government securities.
Furthermore, the CBDC initiative began with pilots in the wholesale segment in November of the previous year and was subsequently extended to the retail segment a month later. The central bank has set an ambitious target, aiming for one million retail transactions per day by the end of 2023.
However, the introduction of CBDCs is not without its challenges. One of the primary concerns is the potential disintermediation, where commercial bank money could shift to central bank money. Addressing this concern, Choudhary stated that the design feature of the CBDC is crucial.
He emphasized that if the CBDC is not interest-bearing, like any other currency, the chances of such disintermediation are unlikely. He further added, “Since CBDC is mimicking the currency, it won’t be interest-bearing.”
India’s move towards CBDCs is in line with global trends, with several countries exploring and testing their digital currencies. The integration of CBDCs into the call money market signifies the potential these digital currencies hold in revolutionizing the financial sector, not just in India but globally.
In addition to the RBI’s endeavors, nine banks have been selected for the pilot project for the wholesale CBDC. These banks include prominent names such as the State Bank of India (SBI), Bank of Baroda, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC, with the recent addition of the Federal Bank.