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CBDC pilot programmes for CPs, CDs likely: RBI

Prelims Only | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: CBDC, CPs, CDs;

Mains level: NA

Why in the news?

RBI Governor Shaktikanta Das unveiled plans for a pilot program targeting the wholesale segment of Central Bank Digital Currency (CBDC) focusing on commercial papers (CPs) and certificates of deposits (CDs).

What is Central Bank Digital Currency (CBDC)?

  • CBDC is a legal tender to be issued by the central bank in digital form; like rupee notes or coins, which are in physical form.
  • It was announced in the Union Budget 2022-23.
  • Subsequently, the Government amended Section 22 of the RBI Act, 1934 through the Finance Bill 2022. [Ref].
  • Working of CBDC:
    • Like fiat currency, it can also be exchanged between people. Simply, put it’s just like rupee (₹) notes but in digital form (e₹). 
    • However, unlike fiat currency that’s usually stored in banks and hence their liability, CBDC is a liability on the RBI’s balance sheet.
    • That’s why one does not necessarily need to have a bank account to own a digital rupee.

 

About Commercial Papers (CPs) and Certificates of Deposits (CDs)

Commercial Papers Certificates of Deposits
Type of Instrument Unsecured promissory note Fixed-income financial instrument
Issuer Large corporations, primary dealers, financial institutions Scheduled Commercial Banks, All-India Financial Institutions
Maturity Period 1 to 364 days 3 months to 1 year (for SCBs), 1 to 3 years (for financial institutions)
Minimum Investment Rs. 5 lakh or multiples thereof Rs. 1 lakh or multiples thereof
Credit Rating Requirement Minimum credit rating required (e.g., A-2) from recognized rating agencies Typically issued by highly rated banks and financial institutions
Collateral Unsecured Not applicable
Purpose Short-term funding for corporations Short to mid-term investment for individuals and institutions
Interest Rate Typically higher than bonds, fluctuates with market conditions Typically fixed, higher than savings accounts, fluctuates with market conditions
Investment Eligibility Individuals, banking companies, corporate bodies (registered or incorporated in India), NRIs, FIIs, etc. Individuals, banking companies, other corporate bodies, NRIs, FIIs, etc.
Issuing and Paying Agent (IPA) Only scheduled banks act as Issuing and Paying Agent Not applicable
Trading Actively traded in Over-the-Counter (OTC) market, reported on Fixed Income Money Market and Derivatives Association of India (FIMMDA) reporting platform Not publicly traded
Dematerialized Holding Can be held in dematerialized form through Securities and Exchange Board of India (SEBI)-approved depositories Can be issued in dematerialized form through SEBI-approved depositories

 

With inputs from: https://www.indiainfoline.com

PYQ:

[2020] With reference to the Indian economy, consider the following statements:

  1. ‘Commercial Paper’ is a short-term unsecured promissory note.
  2. ‘Certificate of Deposit’ is a long-term instrument issued by the Reserve Bank of India to a corporation.
  3. ‘Call Money’ is a short-term finance used for interbank transaction.
  4. ‘Zero-Coupon Bonds’ are the interest-bearing short-term bonds issued by the Scheduled Commercial Banks to corporations.

Which of the pairs above is/are correctly matched?

(a) 1 and 2 only

(b) 4 only

(c) 1 and 3 only

(d) 2, 3 and 4 only

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