Hello and welcome to Finshots Daily. In today's episode we talk about how the RBI is introducing programmability to the E-RUPI. Before we begin today's episode, here's a quick side note. This Valentine's Day, which is tomorrow, we're giving away a premium hamper to one lucky pair. The hamper comes complete with two Apple AirPods Pro, one for you and one for your partner, and Dennis' chocolate is to share. To enter the giveaway, check the link in the description below and follow a few easy steps.
Now back to our story. A year ago, the RBI decided to do something that few other central banks had done before. Launch a central bank digital currency or CBDC. Think of this simply as an online version of a physical currency. It's a digital bank note. See, normally, the RBI would have to print notes and then hand them over to the banks to circle their hands into the system. It could be cumbersome. And with a CBDC, the RBI can simply ask people
to open digital wallets and issue new digital notes to them directly. It can be a direct infusion of cash. And they gave it a name, the E-RUPI. Anyway, they ran a pilot project for a year just to test the waters and see if people were amenable to using this sort of digital cash. And while we wouldn't call it a resounding success, we guess it was enough for the RBI to say, all right, it's time to take it to the next level. And guess
what they have in mind now? A programmable E-RUPI. Wait, what does that mean? You ask? Well, the simplest way to put it is that we need all kinds of tech to be able to issue and manage this digital money. Think fancy blockchain level tech. Now, you can use this tech and set up a smart contract that's built into this cash that says this digital cash can only be used for x, y, z reason. It gives a specific purpose to the digital money. That's programmability.
And you could program it for a whole host of use cases. For instance, if you're thinking of extending cash to farmers so that they could buy fertilizers, then you could technically program the E-RUPI in such a way that it could only be used to buy fertilizers and nothing else. Or you might think the rural economy is flat lining. That's what most FMCG companies have been crying about today. And since consumption is one of the biggest drivers for India's
growth, you might worry. So you will send some digital to replace the rural folks and include a role that allows them to spend it only in a supermarket to buy food stuff. Heck, you could even set an expiration date for the money. You could transfer money to people's accounts and tell them that if they don't spend it within 30 days, it will be worthless. And no one likes to waste free money, right? They'll be forced to spend it and maybe that can give
a boost to the economy. Now, you could argue that you don't need an E-RUPI to do this in reality. And you'd be right. For instance, back in the 30s, many people in the world were affected by a massive economic slowdown. And some economists proposed a crazy idea. Physical cash that could be affixed with a special stamp. But the stamp meant that the holder of the cash would have to bear a periodic fee. So people try to spend this cash and get it
out of their hands as soon as possible. And because money changed hands quickly and created demand, the Austrian economy soon started prospering again. But doing this exercise with physical notes can be an expensive proposition. There are going to be added cause for the limited edition stamps of physical currencies. But in digital format, it becomes that much easier to implement. And if you think about it, it's a dream scenario for a central bank.
They can adjust their monetary policy more easily. Right now, they have to tweak interest rates if they want to control money. The thinking is that when interest rates are cut, it becomes easier for people to borrow money and spend. But then, the RBI has to wait for banks to actually transmit these rates to customers. And banks can often take their own sweet time. This doesn't help monetary policy at all. So the problem here is that the RBI can control
the price of money, but they can't control the velocity of money. But with a CBDC, that changes by setting specific use cases at a time of for the money, they can control the velocity of spending too. Quite crazy, right? Now, you might have a question. Doesn't this violate the principle of fungibility of money? See, fungibility means that all money is the same. With 100 rupees, you can buy a packet of cookies on Swiggy or you can buy
five bottles of water from your Kiranah store. You're free to use it as you please and whenever you want to. But if you set rules saying that 100 rupees can only be used by bread, it loses that feature, right? It's not fungible anymore. And if you add more rules saying that the money will self-destruct in 30 days, then fungibility is dead and buried. But
looks like the RBI doesn't necessarily agree with that. When Deputy Governor T. Rappishankar was asked about it, he launched into an example which we have edited for clarity. Quote, let's say a school has given money to a student who won a prize to buy books in a particular bookshop. So the student can only use his money for that purpose. But as soon as the book is purchased and the currency goes to the bookshop owner, it becomes fungible
again. So it's only for that period, the fungibility of money has become limited. If the student chooses not to spend the money, it goes back to the school and it becomes fungible again. So programmability does not militate against fungibility, but rather just puts it on hold. This seems like an unambiguous lens through which to view the matter. Don't you think? Once the purpose is met, the money is set free. The fungibility exists only for a brief
period. So we can't quite complain about that. So yes, it does seem to be a game changer. Right? But as always, we do have to point out a pitfall with the programmability of a CBDC too. We won't talk about the privacy nightmare where the government will be able to track your every move. We're talking about programmability in this story. So let's just focus on the problem it could face. See, programmability is akin to the central bank
of the government telling you what you can or cannot spend your money on. They control you and your actions. By setting an expiration date, they could course you into spending even if you don't want to. For instance, when the world locked down during the pandemic, the
US government doled out cash to people just to help them tie it over the bad times. Now some people used the money to pay rent or buy groceries, but others saved some of the money too, and they used it to invest in the stock markets. When stocks zoomed higher, they made even more money. They were a happy bunch. But imagine if the government had handed out a program digital dollars instead, and set a condition
that it could only be used at the supermarket. That wouldn't have appealed to a lot of people right? It could even create a trust deficit in the system. And maybe that's why some central banks, such as the Bank of England, have said that they will not pursue government or central bank initiated programmable functions. So yes, we don't know the exact idea the RBI has
in mind right now. It's still early stages, but we can't wait to see how India's central bank will program money to dance to its tunes. Thank you for listening to today's episode. Finch hot's daily is available on a bunch of streaming platforms such as Spotify, Apple Podcasts and Google Podcasts. So make sure you follow us on your favorite podcast streaming platform. Until next time.