Consider the following statements in respect of the digital rupee: 1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy. 2. It appears as a liability on the RBI’s balance sheet. 3. It is insured against inflation by its very design. 4. It is freely convertible against commercial bank money and cash. Which of the statements given above are correct?
Contents9
- A1 and 2 only
- B1 and 3 only
- C2 and 4 only
- D1, 2 and 4
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Answer: (D) 1, 2 and 4
Correct Answer: (d) Statements 1, 2 and 4.
Statement 1: Digital rupee (CBDC) is sovereign currency aligned with RBI's monetary policy — ✓ CORRECT.
Statement 2: It appears as a liability on RBI's balance sheet — ✓ CORRECT.
This is what makes it different from regular digital money in bank accounts (which is a liability of commercial banks).
Statement 3: It is insured against inflation by design — ✗ WRONG.
Like physical currency, CBDC is NOT inherently inflation-proof. Its value can still be eroded by inflation.
Statement 4: It is freely convertible against bank money and cash — ✓ CORRECT.
1 digital rupee = 1 physical rupee.
Key distinction: CBDC is RBI's liability (like a paper note), while money in your bank account is the bank's liability.
RBI launched pilot testing of the digital rupee (CBDC) in 2022-2023, making it a major current affairs topic for competitive exams.
The question tests whether students understand that CBDC is RBI's direct liability, unlike regular digital money which is a commercial bank's liability.
Students must know that no currency design can protect against inflation - even digital currencies lose purchasing power when prices rise.
Digital Rupee (CBDC)
Indian Economy digital rupee CBDC sovereign currency
Digital Rupee (CBDC): Features & UPSC Distinctions
CBDC is RBI's digital version of physical currency — appears as RBI's liability
1:1 convertible with physical rupee and bank money
NOT inflation-proof — value erodes with inflation like physical currency
Launched in pilot mode for wholesale and retail segments
Central Bank Digital Currency (CBDC) or Digital Rupee is RBI's electronic version of physical currency. Unlike money in bank accounts (which is bank's liability), CBDC remains RBI's direct liability — making it true sovereign currency in digital form.
CBDC vs Bank Digital Money
Feature | CBDC (Digital Rupee) | Bank Account Money |
|---|---|---|
Issuer | Reserve Bank of India | Commercial Banks |
Liability of | RBI | Commercial Bank |
Legal Status | Legal tender (sovereign currency) | Bank deposit |
Convertibility | 1:1 with physical rupee | Subject to bank operations |
Monetary Policy Tool | Direct RBI control | Indirect through banking system |
Key Features
Sovereign currency — issued directly by RBI, not commercial banks
Balance sheet impact — appears as liability on RBI's books like physical notes
Monetary policy alignment — RBI can control supply directly
Free convertibility — 1 digital rupee = 1 physical rupee always
This question tested understanding that Statement 3 is false — CBDC offers no inherent inflation protection. Like physical currency, its purchasing power decreases when general price levels rise. The 'digital' nature doesn't create any inflation hedge.
Trap: Assuming 'digital' means inflation-proof — CBDC has same inflation vulnerability as physical rupee
Confusion: Bank digital money vs CBDC — bank money is bank's liability, CBDC is RBI's liability
Statement 3 trap: 'Insured against inflation by design' sounds technical but is completely false
RBI Balance Sheet & Monetary Policy
Indian Economy RBI balance sheet liability monetary policy
RBI Balance Sheet: Assets, Liabilities & Currency Issuance
Currency issued by RBI appears as liability on its balance sheet
Assets: Government securities, foreign exchange reserves, gold
Liabilities: Currency in circulation, bank deposits, government deposits
RBI's balance sheet reflects its role as currency issuer and monetary authority. When RBI issues currency (physical or digital), it becomes RBI's liability — representing RBI's promise to honor that currency's value.
RBI Balance Sheet Structure
Side | Major Components | Examples |
|---|---|---|
Assets | What RBI owns/lends | Government securities, Foreign currency assets, Gold, Loans to banks |
Liabilities | What RBI owes | Currency in circulation, Bank deposits with RBI, Government deposits, Capital & reserves |
Currency as RBI Liability
Physical notes — RBI's promise printed on currency ('I promise to pay the bearer')
Digital rupee — Same promise in electronic form, still RBI's liability
Bank deposits with RBI — Commercial banks' reserves, also RBI liability
Not bank money — Money in your bank account is bank's liability to you, not RBI's
Common error: Thinking currency is RBI's asset — it's actually RBI's liability
Confusion: Bank money vs central bank money — your bank balance is not on RBI's books
CBDC significance: First time RBI liability exists in purely digital form
Inflation & Currency Protection
Indian Economy inflation insured
Inflation Impact on Currency: Why No Currency is 'Inflation-Proof'
No currency (physical/digital) is inherently protected against inflation
Inflation reduces purchasing power of all forms of money equally
Digital rupee has same inflation vulnerability as physical rupee
Inflation means general rise in price levels, which reduces the purchasing power of money. Neither physical currency nor digital currency has any built-in mechanism to maintain purchasing power when prices rise across the economy.
Why Currencies Aren't Inflation-Proof
Same face value — ₹100 note remains ₹100 whether prices rise or fall
Reduced buying capacity — ₹100 buys fewer goods when inflation occurs
No automatic adjustment — Currency value doesn't increase with rising prices
Central bank challenge — RBI uses monetary policy to control inflation, not eliminate currency's vulnerability to it
Inflation Impact Comparison
Asset Type | Inflation Impact | Protection Level |
|---|---|---|
Physical Currency | Purchasing power decreases | No protection |
Digital Currency (CBDC) | Purchasing power decreases | No protection |
Bank Deposits | Real returns may be negative | No inherent protection |
Inflation-indexed bonds | Principal adjusts with inflation | Designed protection |
Real assets (gold, land) | May maintain/increase value | Natural hedge |
Statement 3 trap: 'Insured against inflation by design' — sounds official but completely false
Digital confusion: Thinking 'digital' = 'advanced' = 'inflation-proof' — technology doesn't change economic fundamentals
UPSC pattern: Testing if students understand that currency form (physical/digital) doesn't affect inflation vulnerability