Previous Year Question
Consider the following statements in respect of the digital rupee:
It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.
It appears as a liability on the RBI’s Balance Sheet.
It is insured against inflation by its very design.
It is freely convertible against commercial bank money and cash.
Which of the statements given below are correct?
1 and 2
1 and 3
2 and 4
1, 2 and 4
Correct Answer: D
Detailed Solution
Statement 1 is correct.
The digital rupee is India’s Central Bank Digital Currency—CBDC. It is issued by the Reserve Bank of India and constitutes a digital form of the rupee. It is not a private crypto-asset but a sovereign currency issued by the central bank.
RBI commenced the pilot for the wholesale digital rupee on 1 November 2022 and the pilot for the retail digital rupee on 1 December 2022.
Statement 2 is correct.
The digital rupee is a direct liability of RBI and appears as a liability on its balance sheet. In this respect, it is similar to physical currency notes.
It must be distinguished from a commercial-bank deposit. Money deposited in a bank account is a liability of the concerned commercial bank, whereas the digital rupee is a direct liability of RBI. It therefore does not carry commercial-bank credit risk in the same manner as a bank deposit.
Statement 3 is incorrect.
The digital rupee is not protected against inflation by its design. One digital rupee and one physical rupee possess the same monetary value. If prices of goods and services rise, the purchasing power of both forms of the rupee may decline equally.
CBDC is intended to provide a digital form of sovereign currency, improve payment efficiency and potentially reduce some costs associated with physical cash. It is not automatically an inflation-indexed asset.
Statement 4 is correct.
The digital rupee is convertible at par with commercial-bank money and cash:
₹1 digital rupee=₹1 bank deposit=₹1 cash
A user can convert money held in a bank account into digital rupees and can convert digital rupees back into bank money or cash. This convertibility maintains a uniform value among different forms of the rupee.
The digital rupee is a digital form of legal tender, whereas UPI is not itself money. UPI is a payment system that transfers commercial-bank money between bank accounts; the digital rupee is currency issued by RBI.