However, the growing number of Indians putting money into these new age assets seems to have rocked policy makers. Reserve Bank of India (RBI) Governor Shaktikanta Das said last month that crypto assets pose a threat to India’s financial system. The government is now considering tabling a bill regulating crypto assets in the country. The details are unclear. One possibility is that crypto assets such as Bitcoin will be allowed to continue as an investment alternative, but be banned as a currency used for economic transactions. The government will also pave the way for the RBI to introduce its own digital currency. A senior RBI official said the pilot launch of a new central bank currency could take place as early as the first quarter of next fiscal year.

A digital currency from the Indian Central Bank (CBDC) is inevitable. A survey of central banks earlier this year by the Bank for International Settlements showed that 14% of institutions surveyed had started pilot projects, while 60% were experimenting with the technology. Much has already been written about the offer of the CBDC opportunity, whether it is whether it would initially be open to retail or wholesale payments, for domestic or international payments, and how it can be. made interoperable with the existing payment system, to data protection. concerns, for example.

However, it is also important to draw attention to the demand side of the CBDC opportunity. How will ordinary citizens react to a CBDC, which will in effect give them the ability to bank directly with RBI? Households typically hold most of their liquid financial assets in bank deposits rather than cash, or bank money rather than central bank money. A CBDC will offer them an option other than cash to hold central bank money in order to make payments or protect the value of their savings.

Three sets of issues are worth highlighting when it comes to understanding the potential demand for CBDCs from the private sector.

First of all, it all depends on how households view their balance sheet. In India, for example, household balance sheets have ??17.3 trillion in bank deposits, compared to ??2.4 trillion in cash. There will be minimal impact when converting cash into CBDC assets, since one type of central bank money is converted to another. However, a sudden movement of financial savings from bank deposits to a CBDC could create financial instability, especially in times of economic stress. In 2016, the first few weeks after demonetization saw people forcibly converting their money into bank deposits, or central bank money into bank money. Now think of this as a permanent feature of the financial system.

Second, how households dynamically move from one form of currency to another will depend on the design of our CBDC. One of the main factors affecting such behavior will be the interest rate offered on the holdings of the CBDC. Zero interest rates on these holdings will in effect mean that they are no different from cash, which is also a zero-rate commitment of the central bank. People will then only hold the CBDC for payments. However, the situation will become more complicated if interest rates are at stake and the CBDC becomes a store of value. In addition, the ease of use of the CBDC, for example via existing digital wallets or the unified payment interface, will be an important determinant of household behavior, especially the switch between CBDC, cash and bank deposits. .

Third, quantitative estimates from several economists show that demand for CBDC will be sensitive to macroeconomic factors such as household income, income distribution, share of household financing in the banking system, etc. Most of the estimates currently available are for wealthy economies, so more work needs to be done on this in the Indian context. For example, Bank of Canada economist J. Li used household survey data to estimate that the projected demand for a CBDC by Canadian households could vary from 4% to 55% of their combined holdings in cash and bank deposits, depending on the design of sovereign digital currency.

Economist James Tobin had proposed in 1985 that households be allowed to have direct accounts with the US central bank. This is now possible thanks to the development of new digital technologies. Much of the ongoing debate over an Indian CBDC centers on what RBI should do; much less attention is paid to the equally important question of household reaction.

A final technical point: the demand for money is as important as the supply of money in monetary economics. The same should be true for CBDCs. Unstable demand for money has plagued central bankers since financial liberalization in the mid-1980s widened the portfolio choices of the private sector, both households and businesses. It will be the same with the CBDCs. Monetary management will become more complicated.

Niranjan Rajadhyaksha is a member of the Academic Council of the Meghnad Desai Academy of Economics