An internal Reserve Bank of India (RBI) working group has been exploring the best technology path to develop a roadmap for such direct transactions between two countries.
CBDC, or the equivalent of paper money in a digital form, has the potential to be a game-changer, particularly in Swift-facilitated cross-border settlements.
These currently require the Swift platform for routing funds through banks.
“While the current practice involves settling transactions through traditional banking channels, CBDC could enable direct settlement between parties,” said Mihir Gandhi, partner and leader of payment transformation, PwC India. “The advantages are substantial, but India will also need to address numerous challenges and proactively mitigate associated risks.”
The developments come at a time when India has set up agreements for real-time cross-border fund transfer systems with countries such as Singapore and the UAE. Over the past year, RBI has also, on multiple occasions, highlighted the key role that CBDCs can play in quicker and cheaper cross-border payments.An email sent to RBI did not receive a response until publication of this report.Industry experts also said that instant settlements at a predefined exchange rate will empower companies to manage their fund positions effectively.
RBI, which had launched wholesale and retail CBDC pilots in December 2022, has said it is committed to promoting the ‘e-rupee’ for domestic transactions by expanding acceptance, introducing new use cases and collaborating closely with ecosystem partners.
The wholesale CBDC pilot was initially launched for trades in government securities and now includes some money market segments. The central bank has set a target of 1 million transactions a day by December for the retail CBDC.
“You need like-minded counterparties in other countries that are also interested in figuring out if wholesale CBDC can enable/be a catalyst for non-USD cross-border settlement, and additionally, reduce transaction costs (as bilateral payment rails) compared with incumbent global rails,” said Vijay Mani, partner and leader for banking and capital markets, Deloitte India.
Global Trend
The Eurosystem is proceeding with explorations around the digital euro and was aiming to finalise the investigation phase by October 2023, according to the International Monetary Fund (IMF).
China is conducting a large-scale CBDC pilot in several regions, with hundreds of millions of wallets having been downloaded.
The US Federal Reserve and Brazilian authorities have also been piloting CBDCs.
“The US has FedNow and India has UPI. Both are real-time settlements, and they can easily do the XB money movement as they can manage counterparty risks,” said Uttam Nayak, former head of emerging products, digital, Visa Inc, and now an independent consultant.