Page 41 - Banking Finance October 2025

ARTICLE

lyst for the development of novel financial products and may have an impact on the monetary policy framework
services. and the state of the interbank markets. This could have
significant macroeconomic repercussions in the long
A few experts explains that CBDCs have the potential to term as well as during the initial period of CBDC adop-
improve welfare by reducing financial frictions in deposit tion.
markets by promoting financial inclusion and improving the
transmission mechanism. Introducing interest-bearing The demand for CBDC is going to increase in India because
CBDC increases financial inclusion and diminishes demand its similar to liquid assets such as cash or bank savings. The
for cash and it may also expand depositor base of commer- roles of the central bank and the private sector are delin-
cial banks, if the added competition compels banks to raise eated in the CBDC ecosystem. The central bank is respon-
their deposit rates. The decision on whether a CBDC bears sible for issuing, regulating, and managing the currency,
interest lies within the purview of the central bank, with while the private sector may participate in the development
the inclination generally being towards a nominal interest and distribution of CBDC-related applications and wallets.
rate if interest is offered. Regarding the coexistence of This raises the question of privacy and addressing the level
CBDC and physical cash, central banks' policies vary, with of user privacy, including considerations regarding transac-
some opting for parallel existence and others contemplat- tional anonymity and the central bank's ability to monitor
ing a gradual replacement of cash by CBDC. transactions becomes a key issue.

A lot of attention has been paid to the implications associ- Conclusion
ated with CBDCs with regard to financial stability and mon- As far as the transnationality of electronic money is
etary policy transmission. However, not a lot of research
considered, national jurisdictions and the broader
has taken place on its impact on monetary policy imple- cyberspace could conflict over monetary control soon. At
mentation and what will end up being the macroeconomic its extreme, its ability to flow too freely across borders com-
effects for the same. The impact of CBDC on the financial pared to traditional currencies could create instability in-
system and stability hinges on its design. Potential effects ternationally.
include reduced reliance on commercial banks due to CBDC's
direct accessibility, heightened competition for commercial Hence, there is a temptation to enact deep regulations
banks, leading to improved consumer benefits, and novel concerning the use of money and at the same time con-
avenues for financial innovation in payments and markets. struct parallel structures to exert more control over
Furthermore, the introduction of a retail CBDC can signifi-
cyberspace. Although some form of control is inevitable, the
cantly influence monetary policy: international financial community is likely to be wary of digi-
Greater Monetary Control: By enabling precise moni- tal bureaucracies.
toring and management of the money supply, a retail
CBDC offers central banks enhanced control over mon- The broader cyberspace that hosts such platforms is noto-
etary policy implementation. rious for its lack of transparency, security threats, and po-
New Policy Instruments: A retail CBDC provides cen- tential for malevolent activities. And technology failures are
tral banks with innovative tools, such as the ability to commonplace, especially in the government. But besides
implement negative interest rates or targeted eco- these vexing challenges, digital fiat opens up a world of
nomic stimulus, thus diversifying the range of available welfare-enhancing possibilities. Like any innovative idea,
monetary policy instruments. In modern advanced CBDCs are not devoid of risks. Digital cash will have to be
economies, the majority of central banks run on a 'floor scrutinized and improved along the way.
system' where banks' demand for liquidity is satisfied
by an abundant supply of central bank reserves (also Central banks could cherish new flexibilities in policy but are
known as 'excess reserves') and interbank market rates wise to be treading a cautious path. Finally, user preferences
are effectively regulated by the interest rate on over- will undoubtedly be a crucial factor in determining the mac-
night deposits at the central bank. If the implementa- roeconomic effects of CBDCs. On the technical front, first,
tion of a CBDC results in a significant decline in surplus the focus must be on developing and enhancing the acces-
reserves as a result of the decline in bank deposits, it sibility of CBDCs.

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