Significant development since the last post- RBI has been surprisingly on schedule, with the pilot for e₹-R which was kicked off on Dec 01, 2022.
All hullabaloo around the more public pilot would have raised more, rather than answer questions. Let me contribute to your confusion (remember, the devil is in the details!). So, moving to the third dilemma which Central banks around the world and RBI closer home need to address before this new idea can earn some significance.
| Dilemma No 3 | RBI’s Answer | Rationale |
| Should the e₹ be interest bearing or not? | e₹ balances will be non-interest bearing | RBI wants the e₹ to taste and smell like fiat currency to the extent possible. Since, currency notes (in your wallet or vault) dont earn any inerest, so will be e₹. |
If you don’t see any problem with the above approach, consider the following-
Why would you hold any significant amount in e₹ balance? Remember, despite RBI’s wish for e₹ to compete with Cash, what it is really up against, is the digital rupee and services such as UPI/IMPS/RTGS, etc.
On the other hand, if it was an interest-bearing option, it would lead to pricing pressure on commercial banks. In other words, banks will have to offer a higher delta to make their deposits look attractive. If that happens, the Cost of funds for banks will go up, and consequently, the cost of lending too will have to be increased, and there lies RBI’s dilemma. RBI does not want CBDCs to lead to increased cost of borrowing for the industry.
Moving on, dilemma no 4– If RBI pushes the USP of ‘Finality of settlement’ too much (which btw is the most important feature of e₹) it will in some ways undermine the Banks which RBI has spent so many years developing. The finality of settlement becomes prominent only if there is significant risk perceived in the financial standing of the Commercial banks involved in a transaction. If that is the case, RBI will have a bigger problem at hand. I don’t think they would want to disenfranchise banks that they have worked so hard to build by overplaying the finality of settlement (which btw is only relevant to e₹-W).
In the next and hopefully the last of this series, I will try to share my take on the future of e₹.
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