Indian e₹ (Digital Rupee) Interest Bearing (Remunerated) Or Non-Interest Bearing (Non – Remunerated)

 The classic question is – Should interest be provided for deposits held in e₹ (Digital Rupee) accounts.

          Reserve Bank of India concept note released to the public highlights the pros and cons of Remunerated CBDC and Non-Remunerated CBDC.

          As the launch date comes closer, there will be more visibility on the interest part on Indian e₹ (Digital Rupee)

A couple of extracts are as under:

Remunerated CBDC

The payment of (positive) interest would likely to enhance the attractiveness of an instrument that also serves as a store of value.

Some proponents support interest bearing CBDCs as it could improve the effectiveness of monetary policy by shifting the transmission leg from overnight money market rate to directly deposit rate (or CBDC as a substitute of deposits), strengthening the pass-through of the central bank’s policy rate to the broader structure of interest rates in the financial system.

But, designing a CBDC that moves away from cash[1]like attributes to a “deposit-like” CBDC could lead to a massive disintermediation in the financial system resulting from loss of deposits by banks, impeding their credit creation capacity in the economy.

Further, in such a scenario, banks may be compelled to increase deposit rates, thus increasing their costs of funding and a decrease in Net Interest Income.

As a response to this, banks could be motivated to pass on these additional costs to borrowers or resort to engage in riskier activities in search of higher returns.

Moreover, banks would need to maintain additional liquidity buffers to support CBDC demand, as access to large central bank and money market liquidity would need to be backed by eligible collaterals.

One possible way to mitigate the risk of disintermediation is to impose a cap or limit on individual holdings but these features will reduce the attractiveness and wide acceptability of CBDCs along with adding complexities to the CBDC system

Non – remunerated CBDC

If a CBDC is designed to be non-interest bearing, the public would have less incentive to switch from holding bank deposits to CBDC, and the effect of banking disintermediation would then be limited.

The Bahamas and China currently do not pay interest on CBDC holdings.

In both cases, the reason is to limit CBDC's competing with bank deposits.

If there is no interest, CBDC can still be attractive as a medium of payment, even while its attractiveness as a store of value (savings instrument) diminishes.

Further, non-interest-bearing CBDCs can avoid major disruption to banking services and possible disintermediation of banks.

However, there is still a concern expressed in some quarters that there could be a possibility of shifting some of the current accounts maintained by corporates and business entities with banks in favor of CBDC to gain access to central bank money.

 

Reserve Bank of India believes that the current account is a relationship based and their association with banks is a function of multiple services offered to them and thus it is anticipated that the scale of bank intermediation will be low for such deposits

 

Disclaimer: These are my personal views only. The bottom line is Safe ePayments. Nothing More-Nothing Less.

Errors, if any, are mine only.

Copyright if any, belongs to the original copyright holder only.

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