Explained: How a digital rupee can revolutionise cross-border payments

International transactions in the rupee will reduce the risk of currency volatility for Indian businesses, while making the rupee globally acceptable for payments

By Salil Panchal Forbes India Staff

Published: Jul 11, 2023 06:01:15 PM IST

Updated: Aug 22, 2024 05:49:55 PM IST

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India is talking to several central banks across the globe to promote cross-border payments using the Central Bank Digital Currency (CBDC) Image: Shutterstock

Last year, the Reserve Bank of India (RBI) allowed the settlement of international trade transactions in rupees for countries importing from India. It is now in talks with more central banks across the globe for cross-border payments. These steps are making the rupee more ‘internationally’ acceptable in trade and remittances. It is also creating an ecosystem where countries create alternative currencies for transactions, without being too dependent on the dollar for international trade.

RBI Governor Shaktikanta Das, who was recently awarded ‘Governor of the Year’ at London's Central Banking Awards, said India is talking to several central banks across the globe to promote cross-border payments using the Central Bank Digital Currency (CBDC). While India’s pilots with both retail and wholesale CBDC payments have been successful, the move to use it for cross-border transactions will help resolve existing challenges that companies face.

Why is India trying to internationalise the rupee?

There is no doubt that the US dollar is the most dominant currency in global trade, followed by the euro, the Japanese yen and the British pound sterling. But the clamour for countries to look for alternatives to the dollar for international transactions is only growing. For India, the rupee being used in cross-border transactions reduces the risk of currency volatility for Indian businesses.

Is the creation of a BRICS currency contradictory? What is India planning?

For weeks there was speculation that the BRICS alliance of Brazil, Russia, India, China and South Africa is planning to create a new currency for the settlement of international trade payments, which could challenge the global dominance of the US dollar. But India’s Minister of External Affairs S Jaishankar told media on July 3 that India has no plans for a BRICS currency.

India has strong trade relations with the United States and much of Europe. It does need the support from BRICS to enhance this and can survive without a new BRICS currency. The focus, thus, will be to continue to strengthen the acceptability of the Indian rupee globally and create a platform for the usage of the digital rupee.

Is the CBDC (digital rupee) limited to executing domestic payments?

No, the RBI proposal for the digital rupee is not limited to ensuring transparent and secure payments towards domestic payments. The bank’s 2022 concept note talks about the potential of CBDC to make cross-border payments in an instant and transparent manner. India has already been running retail and wholesale pilots with several banks and merchants nationwide, for over six months now, through over 1.3 million customers and 300,000 merchants to boost coverage and acceptability of the digital rupee.

Also read: Digital currencies: Why the RBI needs to bite the bullet

What is the potential of the CBDC to change the way we transact?

India is the world’s largest remittance-led country, having received $89 billion of foreign inward remittance in FY22, according to official government data. The US is the biggest source, accounting for over 20 percent of these funds. Our share in global merchandise trade, though small at 2.2 percent in FY22, continues to grow each year.

There are now 130 countries across the globe that are working towards launching CBDCs. This includes 32 countries where it is in the development mode, another 46 are doing research and 21, like India, are carrying out pilots; 11 have already officially launched CBDCs. Currently countries largely use the SWIFT (Society for Worldwide Interbank Financial Telecommunications) network for cross-border remittances. Promoting the CBDC for cross-border transactions is also a step by the RBI towards making the Indian rupee an internationally acceptable currency for payments.

Also read: Digital Currency Pilots: On Course, With Potential To Achieve Something Huge

How will CBDCs be used for international remits?

Let us use an example here. At present a person in Singapore who wants to remit $1,000 to someone in India will go to a Singapore-based bank (or its online banking platform) to initiate a transfer to a bank in India. The bank in Singapore sends the payment using SWIFT. A notification will come in the Indian bank’s corresponding account seeking funds to be credited. But this normal transaction usually takes a day.

Hypothetically speaking, if the two countries’ CBDCs are in place, and bilateral agreements have been signed between their respective central banks (in this case Monetary Authority of Singapore and the RBI), a digital transaction can take place. Assuming that the US dollar is not the currency of choice, tokens would be issued by each bank in their own currency to transact. At this stage we are yet to get clarity on inter-regulatory settlements using digital currencies.

Can this be expanded to B2B cross-border transactions?

Potentially, the same process might also be possible for B2B commercial transactions between two companies. The advantages of a cross border transaction using digital currency are huge, bringing in instant settlement and transparency. They would reduce the challenges of being in different time zones, exchange rate differences and legal and regulatory requirements across jurisdictions.

Also read: We've Seen A Digital Currency Silently Launched In India; It Is Massive: Yes Bank's Ajay Rajan

Will India try to have such agreements with all countries?

Unlikely. India will seek to have agreements with those countries with which it has trade and remittance corridors. Regulators and central banks of those countries need to be willing to create such an agreement. But potentially, in the future, India would want to have such arrangements with the US, Canada, the UK, Russia, China, UAE, Singapore, South Africa and more African countries.

Realistically, how much time would it take for CBDC cross-border transactions?

Most countries are finalising their domestic payment pilots. No country is ready as yet but it could be done through similar pilots. These agreements could be a 2 to 3 years away. In the interim, India is expanding the facility to settle trades in rupees, if a bank has a shortage of US dollars.