The Reserve Bank of India sees a central bank digital currency (CBDC) as a double-edged sword that could promote financial inclusion but also undermine commercial banks' role in the economy.
In a report released Friday, the central bank said a "CBDC can be designed to promote non-anonymity at the individual level, monitor transactions, promote financial inclusion by direct benefit fiscal transfer, pumping central bank 'helicopter money' and even direct public consumption to a select basket of goods and services to increase aggregate demand and social welfare."
Helicopter money refers to distributing large sums of money directly into consumers' bank accounts to support the economy during times of stress, such as the recent coronavirus crisis. Observers told CoinDesk last year that CBDCs could speed money transfers to consumers but also spur inflation.
According to the RBI, an interest-bearing CBDC would improve an economy's ability to respond to changes in the policy interest rate and enhance monetary policy transmission.
In emerging markets with large-scale capital inflows, a CBDC can act as an instrument of "sterilization," alleviating the constraint posed by a finite stock of government securities on the central bank balance sheet, it said.
The RBI, however, cautioned that a CBDC could lead to banking sector disintermediation.
"CBDC is, however, not an unmixed blessing – it poses a risk of disintermediation of the banking system, more so if the commercial banking system is perceived to be fragile," per the report.
"The public can convert their CASA (current account savings account) deposits with banks into CBDC, thereby raising the cost of bank-based financial intermediation with implications for growth and financial stability," the regulator said. Thus, banks may lose importance as the primary channel through with monetary policy is implemented.
In simple terms, the public may hold large sums of an interest-bearing CBDC, forcing commercial banks to raise interest paid on deposits to retain customers. In turn, banks would either experience tightening of margins or have to charge higher interest rates on loans, as previously noted by the International Monetary Fund.
The RBI report also expressed concerns over CBDC designs promoting anonymity, as they could potentially aid money laundering and terrorism financing.
The Indian government is currently considering a bill that would facilitate development of a CBDC and ban "private cryptocurrencies."