Abstract
This paper assesses the potential impact on liquidity management and monetary policy transmission of various designs of CBDC—Digital Rupee—in the context of the new monetary policy framework that the Bank of Mauritius plans to adopt in 2022. It finds that issuing digital currency—especially when remunerated—may not bring clear advantages for liquidity management and may lead to complications for the transmission of the policy rate to market rates. A simpler option of non-interest-bearing retail Digital Rupee could be a safer option as it would lead to a lower risk of interference with polic y transmission.
Impact of Digital Rupee on Liquidity Management and Monetary Policy Transmission1
This paper assesses the potential impact on liquidity management and monetary policy transmission of various designs of CBDC—Digital Rupee—in the context of the new monetary policy framework that the Bank of Mauritius plans to adopt in 2022. It finds that issuing digital currency—especially when remunerated—may not bring clear advantages for liquidity management and may lead to complications for the transmission of the policy rate to market rates. A simpler option of non-interest-bearing retail Digital Rupee could be a safer option as it would lead to a lower risk of interference with polic y transmission.
A. Background and Objective of the Paper
1. Mauritian authorities aim to foster digitalization by leveraging emerging technologies and introduce central bank digital currency (CBDC) to support public policy objectives such as efficiency and stability of the payment systems in the digital age. The country has established digital infrastructure and mobile data availability and penetration required to support digital payments. In 2019, the Bank of Mauritius (BOM) launched a National Payment Switch consisting of two components: Instant Payment System (IPS) and Card Payment System (CPS).2 The authorities have set out the Digital Mauritius 2030 Strategic Plan. Despite an advanced digitalized payment ecosystem, Mauritius remains a cash-based economy and managing cash is very costly. The Bank of Mauritius intends to issue Digital Rupee (DR) to achieve objectives that include: (i) reducing physical Rupee in circulation in order to reduce the cost for issuing, circulating, accessing, and managing cash; (ii) providing the population with a digital form of central bank money, including for the informal sector; (iii) bringing resilience to the current payment infrastructure of the country; (iv) preparing the economy to accommodate innovative products that would automate payments such as tax through smart contracts; (v) preserving the sovereignty of the Mauritian rupee by curbing the adoption of cryptocurrencies; (vi) preserving financial integrity by reinforcing anti-money laundering and combating the financing of terrorism (AML/CFT) measures.
2. The paper aims to analyze the possible impact of the DR on liquidity management and monetary policy transmission in Mauritius. As this is a very new area and with ongoing debates, we abstain from claiming that our discussion is complete, or any conclusions are final. However, the paper contributes to debates and analysis to help the BOM make an informed decision about the design, pilots, issuance, and capacity building. This paper could be timely as the BOM is heading towards a modernized inflation targeting framework supported by an effective interest-rate-based management. It appears important in this context to analyze the impact of DR on liquidity management and monetary policy transmission. In what follows we primarily focus on the first step in policy transmission, i.e., from the policy rate to the short-term rate.
3. The paper concludes that the simpler design of non-remunerated retail DR seems to be less distortive and hence preferable. When discussing the impact of DR on liquidity management and monetary policy transmission, the paper investigates both retail and wholesale DR with different design options with respect to remuneration. It appears that wholesale DR impacts liquidity management more directly. In both cases of remunerated retail and wholesale DR, the impact on monetary policy transmission may be adverse as it potentially blurs the policy signal.
4. The paper proceeds as follows. Section I describes the key aspects of the new monetary policy framework that the BOM plans to roll out in 2022. It serves to identify the specific country conditions in which DR issuance will occur and the effect on transmission of the policy rate and liquidity management is analyzed. Section II presents several dimensions in which DR is issued: assets used to exchange for, remuneration, and redeemability. Section III discusses the possible impact of DR on liquidity management and monetary policy transmission, and section IV concludes.
B. Modernizing Monetary Policy Framework in Mauritius
5. The BOM has announced introducing inflation targeting framework back in 2006, but its practical implementation remained incomplete. No formal quantitative inflation objective has been announced, and the effectiveness of the domestic liquidity and interest rate management was limited. The latter was mostly because the system of policy instruments either lacked some important elements or was not clearly parameterized till recently, including: (i) effective standing facilities were absent for most of the time since 2006 and hence there were no constraints to the interest rate volatility in the money market, (ii) the main open market operations (OMOs) were of medium-term (three months) rather than short-term (7 or 14 days) maturity, (iii) the interest rate that the BOM used in its bill auctions often deviated from the announced key repo rate—the policy rate, (iv) the reserve averaging period was relatively short at two weeks and borrowing from required reserves was constrained.
6. Historically the system was dominated by structural liquidity surplus, which was less than fully sterilized by the BOM and therefore limited the effectiveness of the interest rate management and blurred the policy signal. Because the liquidity surplus was not fully absorbed by the BOM instruments, the excess liquidity remained in the system. It became especially visible when the BOM actively intervened in the market to purchase FX during 2016–2019, and the amount of excess liquidity increased substantially. Although the direction of FX interventions reversed during the pandemic period of 2021–22, and large amounts of foreign reserves were sold, the excess domestic liquidity remained. At that time, it was fueled by other factors including large fiscal deficit monetization and quasi-fiscal expenditures financed by the BOM, and again, not fully sterilized through the BOM instruments. As a result, BOM’s interest rate management was not effective with the money market interest rate systematically and substantially below the announced policy rate or the rate that the BOM attached to its main OMOs. The monetary policy transmission of the announced monetary policy rate was hence blurred.
Excess cash reserves, policy and short-term interest rates
(percent)
Citation: IMF Staff Country Reports 2022, 224; 10.5089/9798400214844.002.A003
Sources: BOM and Staff calculationsExcess cash reserves, policy and short-term interest rates
(percent)
Citation: IMF Staff Country Reports 2022, 224; 10.5089/9798400214844.002.A003
Sources: BOM and Staff calculationsExcess cash reserves, policy and short-term interest rates
(percent)
Citation: IMF Staff Country Reports 2022, 224; 10.5089/9798400214844.002.A003
Sources: BOM and Staff calculations7. The BOM envisions modernizing its monetary policy framework by adopting an explicit inflation target. The BOM intends to announce a medium-term inflation objective as a target range of 2 to 4 percent, which should allow for more flexibility and recognize that the central bank might not be able to steer inflation to a particular value in the short run. At the same time, the bank will prefer and act accordingly to see the inflation close to the midpoint of the range. In the context of inflation targeting framework inflation forecast will be an intermediate target.
8. The key policy interest rate will signal the policy stance and define the level of the operating target. The policy interest rate will need to be transmitted to the short-term money market interest rate, which will be an overnight money market rate. The task of the BOM will then be “to put money where its mouth is,” that is, to deploy the system of monetary policy instruments to ensure that the overnight rate is aligned with announced policy rate.
9. To transmit the level of the policy rate to the overnight market the BOM will deploy a new system of instruments based on the mid-corridor system. The symmetric interest rate corridor will be defined by standing overnight deposit and credit facilities. The width of the corridor will be constant around the key policy rate and will define the maximum amplitude for the interest rate fluctuations in the overnight market. The key policy instrument that the BOM will deploy in main OMOs will be of 7 days maturity and be traded in weekly fixed-rate full-allotment auctions. The rate will be fixed at the level of the announced policy rate. The key instrument will be deployed in combination with the reserve averaging mechanism and fine tuning and longer-term structural liquidity operations.
10. To inform the discussion in the subsequent sections we primarily look at how introducing DR will affect liquidity and monetary policy transmission in the context of modernized monetary policy framework, while the structural liquidity position will still be in surplus.3 Under structural surplus liquidity conditions, the key policy instrument deployed in OMOs will be the BOM bills. For effective interest rate management, the amount of excess liquidity held by banks at their accounts in the BOM should decline to close to zero.4 Further, we evaluate the following:
Impact on liquidity surplus. In the past, with banks holding mostly long positions in liquidity a nd given a limited amount of government securities in the BOM’s portfolio, the ability to conduct reverse repos was constrained. The BOM thus leaned towards the issuance of BOM bills for liquidity management. Due to less than full sterilization through the BOM’s OMOs, the rupee excess liquidity was at Rs28 billion, while about Rs130 billion of liquidity was further absorbed by BOM instruments by end-2021. Because mopping up liquidity will likely remain important going forward, it appears useful to analyze whether issuing DR may impact the liquidity surplus.
Impact on liquidity sterilization costs. The cost of removing liquidity surplus through the BOM bills reached Rs2.1 billion in 2021 and may increase in the coming years as the BOM normalizes the policy stance and possibly mops up larger amounts to eliminate the excess. It is then useful to consider whether and how issuing DR may affect the costs of liquidity sterilization.
Impact on transmission of the policy signal given by the key policy rate. In the context of inflation targeting and modernized operational framework, the BOM will manage the interest rate. The question then is whether issuing the DR may potentially interfere with the policy signal defined by the key policy rate.
C. DR issuance: Three Dimensions
11. CBDC is a digital form of fiat money issued by a central bank for either the public (“general purpose” or “retail’’ CBDC, rCBDC) or for financial institutions and financial market payments (“wholesale” CBDC, wCBDC). CBDC is a direct liability of the central bank, different from other direct central bank liabilities such as balances in traditional reserve or settlement accounts. The closest analogy for the rCBDC is physical currency in circulation. Issuing wCBDC means that it will be available to banks as the means of final settlement. The closest analogy for wCBDC is domestic reserve money. Among the major CBDC design choices, a key consideration is along three dimensions in issuing CBDC—assets used to exchange for CBDC, remuneration, and redeemability.
12. In theory, three options of assets to exchange for DR can be considered when issuing DR: (i) currency in circulation, (ii) bank domestic reserves, and (iii) high-quality liquid assets (HQLAs) such as government bonds. In order not to break the uniformity of the payment system, DR would be issued and exchanged at par for other forms of central bank money (currency in circulation and reserves), thus maintaining the fungibility of the monetary base.
13. Introducing DR against currency in circulation means that users would swap the DR for physical Rupee. To the extent that DR is accepted as a substitute for physical Rupee in circulation, a reduction in the latter may take place. In such a case, domestic reserves in the BOM will not change as some currency in circulation could be converted to an equal amount of DR (Rs1 billion in panel 2 in Annex I).5 On the other hand, the demand for physical Rupee may not change, and the amount in circulation will not necessarily decrease if DR is seen as a complement to physical Rupee.
14. In the following sections we focus on issuing DR when it is exchanged for domestic reserves. Introducing DR against domestic reserve money would mean that banks would be exchanging domestic reserves to an equal amount of DR (Rs1 billion in panel 3 in Annex I). We note here that the equivalent reduction in conventional domestic liquidity would take place when wholesale DR (wDR) is issued against reserves. However, when retail DR (rDR) is issued against reserve money, this does not imply that domestic reserves would ultimately decline by an equivalent amount. Depending on public preferences, the substitution in this case may be for both deposits (and other interest-bearing assets) and for currency in circulation. While substituting for deposits will ultimately lead to decrease in stock of domestic liquidity, substituting currency in circulation will not.
15. Two options are available with respect to remuneration dimension: non-interest-bearing and interest-bearing CBDC. The views regarding remunerating CBDC vary in the literature. For example, Pfister (2019) suggests that wCBDC could be remunerated at the same interest rate as required reserves to keep reserves and CBDC at par, as well as to ensure simplicity and efficiency, even if this might lead to a substitution of wCBDC for reserves.6 The pros and cons of the design with remuneration is also considered in the paper by BIS (2018), and it is found that the desirability of this for monetary policy purposes remains questionable although the remuneration rate would directly affect the deposit and other asset rates in some of the designs such as rCBDC.
16. Redeemability refers to the ability of the holders to exchange DR for other assets (e.g., physical Rupee, deposits, and reserve money) and different forms of limits or caps can be used as mitigation measures for risks related to the introduction of DR. For example, by setting a cap on how much reserve can be exchanged for DR in each period, or by selecting banks with strong capital position as leading distributors of DR, the degree of liquidity reduction could be managed, and the risk of bank disintermediation could be mitigated. Such caps may be especially important as transitional arrangements that aim to ensure financial stability when new DR is first introduced. A similar cap can be applied on the conversion from bank deposits to DR in terms of daily transaction and/or DR balance limits to mitigate risks of bank disintermediation and liquidity volatility in case it turns out that such volatility tends to increase with the introduction of CBDC. Existing CBDCs such as the Central Bank of Nigeria’s eNaira and People’s Bank of China’s E-CNY, both have certain caps on transaction and balance limits to ease the crowding-out of bank deposits.7
D. Possible Impact of Issuing RDR
17. Introducing non-interest-bearing rDR would create relatively less pressure on banks’ deposit outflows, and hence, the reduction in domestic reserves and the impact on monetary policy would be more limited. The impact on domestic liquidity and policy transmission seems to be more limited since it is more likely in this case that the end-users will be less inclined to substitute interest-bearing assets. Hence, the substitution is relatively more likely for currency in circulation (i.e., the growth rate of physical Rupee may be lower) with a more limited reduction in the amount of end-user deposits and systems’ liquidity surplus. Given that the reduction in deposits is more limited, it also implies that sensitivity of liabilities to the policy rate changes should largely remain unchanged. The impact on the conduct of operations in the new framework, liquidity sterilization costs, and the policy transmission from introducing rDR would then be more limited if there is more substitution for currency in circulation rather than for deposits. To the extent that some substitution for deposits takes place, the reduction in deposits and system’s liquidity may occur and the premium in deposit rates may increase implying a new equilibrium for the deposit interest rates. In addition, non-interest-bearing rDR creates less pressure on bank deposits and intermediation when the policy rate is away from the zero lower bound. In contrast, in the environment of ultra-low rates, there might be a stronger incentive to switch to rDR from deposits and hence stronger disintermediation.
18. Interest-bearing rDR would mean that DR can be used as both the store of value and the means of payments, and the impact on liquidity and policy transmission may be larger than that for non-interest-bearing rDR. The opportunity to receive a return on rDR makes it more attractive than physical currency. Also, DR will compete with other financial assets, including bank deposits, relatively more than in the case of non-interest-rate bearing rDR. Therefore, due to relatively stronger substitution for deposits, the amount of the latter and total liquidity surplus held by banks at the BOM would decline. The transmission of the policy rate may become weaker as the demand for assets sensitive to current and expected changes in the key policy decreases.8 As the supply of deposits may become relatively smaller, the equilibrium interest rate on deposits may increase due to higher premium that banks will need to pay in such circumstances.
19. The end effect on the central bank costs of monetary policy may be ambiguous when issuing interest-bearing rDR. On the one hand, the cost of sterilizing surplus through OMOs may be lower as may be the cost of managing physical Rupee. On the other hand, remunerating rDR adds to the costs.
20. Further challenges for setting monetary policy and complications for policy transmission appear in this case. It may be argued that because rDR remuneration rate directly competes with the rates for assets (e.g., deposits), then the transmission of changes from the former are stronger.9 However, there is an associated risk for monetary policy transmission. It is not clear how to make sure that the rDR remuneration rate and the key policy interest rate prevailing in the short-term money market are set consistently, so that arbitrage opportunities are not created, and that the rDR remuneration rate does not interfere with signaling the policy stance and the policy transmission does not become blurred.10
21. Constraining redeemability by introducing caps and limits on exchanging DR for other assets in either of the cases—non-interest- or interest-bearing rDR—may help constrain the adverse impact on liquidity management and transmission mechanism. Such constrains would also limit the attractiveness of rDR and therefore the demand for it, and the substitution of other assets and the interference with the policy rate signal. We note, however, that the same effect could be achieved by limiting the issuance (i.e., the supply of rDR) in the first place.11
22. Volatility patterns of system’s liquidity may change when rDR is issued and may require more frequent fine-tuning operations. The issue may seem to be less pressing for the conduct of operations by the BOM in the context of the new policy framework that assumes conducting OMOs as fixed-rate full-allotment auctions. Such operations do not require the BOM to forecast system’s liquidity to parameterize the auctions. However, banks will have to account for changes in volatility when managing their own liquidity and deciding their transactions with other banks and the BOM, e.g., with respect to bids for the BOM bills. In case volatility increases in the system, the BOM will need to mitigate it by deploying fine-tuning operations more actively or banks will need to make more active use of required reserve averaging mechanism.
E. Possible Impact of Issuing wDR
23. Introducing wDR against bank reserves implies a more direct interaction with the liquidity and operational elements of the new monetary policy framework. We note that wDR remains a means of settlement, whether it is remunerated or not. For that reason, the structural liquidity position—in now broader sense of the sum of DR and conventional domestic reserves— would remain the same, and the issuance of wDR would not change the principal task of managing liquidity by the BOM in the new operational framework. The central bank would still need to conduct operations to ensure that no excess liquidity is left in the system to align the money market interest rate with the policy rate.
24. Non-interest-bearing wDR is unlikely to impact liquidity management or the transmission mechanism significantly. It appears that wDR would only be used intraday, i.e., at the end of each day, banks will redeem wDR for conventional reserves to allocate liquidity in the BOM instruments or to top up required reserve balances. The demand for wDR may hence be more limited with no clear positive impact on managing liquidity, reducing monetary policy costs, or improving transmission.12
25. If interest-bearing wDR is issued, it may become attractive as a substitute for conventional domestic reserves and may compete with the BOM’s money market instruments, however the case for remunerating wDR seems weak. The combination of remuneration and possible efficiency gains from using wDR—including security and other technological advantages of an alternative payment system—may prompt banks to reallocate from holding conventional reserve money and possibly reduce the amount of liquidity surplus allocated in the main BOM instrument at the policy rate. Then it may appear as if wDR helps reduce sterilization costs. Importantly, however, wDR should not be seen as yet another instrument to absorb liquidity surplus: in fact, reallocating to wDR is just swapping into another form of liquidity. As a result, wDR becomes an equivalent of excess liquidity but is not an equivalent of the BOM instrument used in OMOs.13 The excess in the new framework should be absorbed through main OMOs—which will bring the costs back—or otherwise it will interfere with the BOM’s efforts to manage the money market rate. Besides, remunerating another form of liquidity in the framework where conventional required reserves are not remunerated would interfere with the interest rate condition put forward in Pfister (2019).14
26. Setting the interest rate on wDR would create a complication as it interferes with the key policy signal. Indeed, as suggested by many in the literature, if institutional investors could hold wDR without limits, the remuneration rate could become the hard floor for money market rates. However, the efficiency gains from using wDR are hard to measure directly. Therefore, it is difficult to say ex-ante what should be the rate that the BOM pays on wDR compared with the policy rate to avoid arbitrage. For example, in the environment of liquidity surplus, the risk is to set the interest rate on wDR inconsistently high, so that the result could be a reduction of demand for the short-term instruments used in OMOs. Similar to the case of remunerating rDR, the interest rate on wDR would be interfering with the main policy signal effected through OMOs. It seems reasonable for the central bank to control only one short-term rate, as highlighted in Bindseil (2004). That is, the policy rate should continue to define the rate in the short-term OMOs for conventional liquidity held as fixed-rate full-allotment auctions for BOM bills, while standing facilities will define the s ymmetric interest rate corridor, as the BOM envisions in the new framework.
F. Revisiting Assumptions: Possible Impact of Issuing DR if Excess Liquidity Remains in the System
27. Excess liquidity remaining in the system may indicate that the new framework implementation is not complete, however, issuing DR in such circumstances will not necessarily improve the policy transmission. That would imply that the interest rate management remains not effective, and the overnight money market rate deviates from the policy rate. Issuing rDR against reserves may initially reduce the amount of excess liquidity in the system. However, given that BOM’s policy operations would still not aim at fully absorbing the liquidity through OMOs on a systematic basis, the excess liquidity may reemerge if, for example, the BOM reduces absorption of liquidity in the BOM bills or driven by other liquidity factors, the surplus increases again and exceeds the sum of demand for DR and supply of the main BOM instruments. Also, for DR that is remunerated the problem of the blurred policy signal and transmission would not only remain in place but potentially aggravate. Already before issuing DR the policy signal would remain blurred in Mauritius as the announced policy rate, the rate in OMOs and the overnight rate in the money market would not be aligned against the backdrop of excess liquidity, and the remuneration rate on DR would add to the multitude of such rates. While issuing wDR may replace some of the conventional excess liquidity, it would not change the aggregate amount of excess and surplus in a broader sense, because wDR is itself the means of settlement and would remain part of aggregate excess and surplus.
G. Conclusion
28. At the current juncture, it appears that issuing unremunerated rDR is a more straightforward option with the least impact, including the adverse, on liquidity management and monetary policy transmission in the context of the new policy framework. When issuing DR, the BOM needs to manage policy tradeoffs and synergies, including managing the possible adverse impact on liquidity management and monetary policy transmission. Importantly, when issuing unremunerated rDR, the interference with the policy signal appears to be lower, which is important for proper functioning of the interest-rate-based policy framework. The objective of improving liquidity management and monetary policy transmission could be better addressed by a more effective system of policy instruments, as is envisaged in the BOM’s new policy framework. Although we highlighted and approached some of the questions regarding the impact of DR on liquidity management and monetary policy transmission, further and deeper discussions are warranted before launching DR.
References
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Pfister, Christian, 2019, “Central Bank Digital Currency: One, Two or None?” Banque de France, Working Paper # 732.
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Soderberg, Gabriel, Marianne Bechara, Bossu Wouter, Natasha Che, Sonja Davidovic, John Kiff, Inutut Lukonga, Tommaso Mancini-Griffoli, Tao Sun, Yoshinaga Akihiro, 2022, “Behind the Scenes of Central Bank Digital Currency,” International Monetary Fund, FinTech Notes # 2022/04
Annex I. Analytical Balance Sheets of the Bank of Mauritius and Banks (in billions of Rupees)
| Assets | Liabilities | Assets | Liabilities | |||||
|---|---|---|---|---|---|---|---|---|
| Currency | 8 | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | |
| Deposits at the Bank of Mauritius | 174 | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | 50 | |
| Credit to the public | 736 | Deposits from the Bank of Mauritius | 0 | Securities | 190 | Deposits of other depository corporations | 250 | |
| Net Claims on Central Govt | 179 | Other liabilities | 84 | Other items | 137 | Other items | 163 | |
| Other assets | 924 | Equity | 189 | Equity | 20 | |||
| Total | 2021 | Total | 2021 | Total | 484 | Total | 484 | |
| Currency | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | ||
| Digital Rupee | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | |||
| Deposits at the Bank of Mauritius | 174 | Deposits from the Bank of Mauritius | 0 | Securities | 190 | Digital Rupee | ||
| Credit to the public | 736 | Other liabilities | 84 | Other items | 137 | Deposits of other depository corporations | 250 | |
| Net Claims on Central Govt | 179 | Equity | 189 | Other items | 163 | |||
| Other assets | 924 | Equity | 20 | |||||
| Total | 2021 | Total | 2021 | Total | 484 | Total | 484 | |
| Currency | 8 | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | |
| Digital Rupee | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | 50 | ||
| Deposits at the Bank of Mauritius | Deposits from the Bank of Mauritius | 0 | Securities | 190 | Digital Rupee | |||
| Credit to the public | 736 | Other liabilities | 84 | Other items | 137 | Deposits of other depository corporations | ||
| Net Claims on Central Govt | 179 | Equity | 189 | Other items | 163 | |||
| Other assets | 933 | Equity | 20 | |||||
| Total | 2021 | Total | 2021 | Total | 484 | Total | 484 | |
| Currency | 8 | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | |
| Digital Rupee | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | 50 | ||
| Deposits at the Bank of Mauritius | 174 | Deposits from the Bank of Mauritius | 0 | Securities | Digital Rupee | |||
| Credit to the public | 736 | Other liabilities | 84 | Other items | 137 | Deposits of other depository corporations | 250 | |
| Net Claims on Central Govt | Equity | 189 | Other items | 163 | ||||
| Other assets | 924 | Equity | 20 | |||||
| Total | 2021 | Total | 2021 | Total | Total | |||
| Assets | Liabilities | Assets | Liabilities | |||||
|---|---|---|---|---|---|---|---|---|
| Currency | 8 | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | |
| Deposits at the Bank of Mauritius | 174 | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | 50 | |
| Credit to the public | 736 | Deposits from the Bank of Mauritius | 0 | Securities | 190 | Deposits of other depository corporations | 250 | |
| Net Claims on Central Govt | 179 | Other liabilities | 84 | Other items | 137 | Other items | 163 | |
| Other assets | 924 | Equity | 189 | Equity | 20 | |||
| Total | 2021 | Total | 2021 | Total | 484 | Total | 484 | |
| Currency | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | ||
| Digital Rupee | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | |||
| Deposits at the Bank of Mauritius | 174 | Deposits from the Bank of Mauritius | 0 | Securities | 190 | Digital Rupee | ||
| Credit to the public | 736 | Other liabilities | 84 | Other items | 137 | Deposits of other depository corporations | 250 | |
| Net Claims on Central Govt | 179 | Equity | 189 | Other items | 163 | |||
| Other assets | 924 | Equity | 20 | |||||
| Total | 2021 | Total | 2021 | Total | 484 | Total | 484 | |
| Currency | 8 | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | |
| Digital Rupee | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | 50 | ||
| Deposits at the Bank of Mauritius | Deposits from the Bank of Mauritius | 0 | Securities | 190 | Digital Rupee | |||
| Credit to the public | 736 | Other liabilities | 84 | Other items | 137 | Deposits of other depository corporations | ||
| Net Claims on Central Govt | 179 | Equity | 189 | Other items | 163 | |||
| Other assets | 933 | Equity | 20 | |||||
| Total | 2021 | Total | 2021 | Total | 484 | Total | 484 | |
| Currency | 8 | The public’s deposits | 1574 | Monetary Gold and SDRs | 45 | Reserve money | 300 | |
| Digital Rupee | Debt securities and loans | 174 | Currency and Deposits | 111 | Currency in circulation | 50 | ||
| Deposits at the Bank of Mauritius | 174 | Deposits from the Bank of Mauritius | 0 | Securities | Digital Rupee | |||
| Credit to the public | 736 | Other liabilities | 84 | Other items | 137 | Deposits of other depository corporations | 250 | |
| Net Claims on Central Govt | Equity | 189 | Other items | 163 | ||||
| Other assets | 924 | Equity | 20 | |||||
| Total | 2021 | Total | 2021 | Total | Total | |||
Prepared by Mikhail Pranovich (AFR) and Tao Sun (MCM). The authors are grateful for insightful discussion and comments received from participants of the MCM seminar on CBDC as well as from MCM divisions during the review process: Cemile Sancak (AFR), Simon Gray, Ismail Arif, Romain Veyrune, Kelly Eckhold, Manmohan Singh and Darryl King (all MCM).
While Mauritius has established a good digital infrastructure, its current payment landscape is dominated by banks with limited Fintech development. The broadband penetration rate is 91 percent, and the mobile phone subscription rate is 151.9 percent. Mobile internet is widely available through prepaid packages available on any of the Mobile Network Operators. Internet banking is increasingly used by consumers. Although e-commerce and online services are not yet widespread in Mauritius, the trend is gaining ground. In addition, while most commercial banks have channels for internet banking and some also have channels for mobile banking, the two biggest banks account for more than 40 percent of the total banking assets. Fintech is yet to be developed, and the market share of the three firms as compared to the traditional borrowing/lending sources is relatively small. The adoptio n of cryptocurrencies and stablecoins currently remains low. The BOM indicated losing monetary sovereignty as a concern, and banks issued a statement that users should burden the risks of using crypto currencies.
If the structural liquidity position changes to deficit, it will not fundamentally change our analysis and preliminary conclusions. As any central bank deploying the interest-rate-based framework, the BOM would need to change the direction of main OMOs to inject liquidity.
We note that some precautionary buffer of excess liquidity may still be held by banks, while all involuntary excess reserves should be absorbed to deliver effective policy transmission.
However, the share of DR issued in this way is expected to be very limited in an increasingly digital payment system.
According to Pfister (2019) setting rCBDC’s remuneration rate below or equal to the interest rate of reserves would dissuade institutions from holding the rCBDC and thus keep it for the public. In addition, rCBDC’s remuneration rate should also be below or at the same level as that of wCBDC if the latter is also issued, to avoid creating arbitrage opportunities for wCBDC holders. rCBDC’s remuneration rate could put a floor to bank deposit rates, and a remunerated rCBDC would raise this floor. Therefore, the remuneration rates between rCBDC and wCBDC should be coordinated. In any case, whether rCBDC is remunerated or not, the following inequalities need to be respected: interest rate on required reserves ≥ interest rate on wCBDC ≥ interest rate on rCBDC ≥ Effective lower bound.
The PBOC has put in place a system frictions to prevent the rapid spread of bank runs. It uses a tiered design of e-CNY wallet with different caps on transaction and balance for different types of e-CNY wallets (PBOC, 2021).
This is also the case of the pressure on financial sector intermediation from issuing CBDC.
See for example discussion in the BIS (2018).
This is similar to the argument that an interest-rate-managing central bank in normal circumstances should control the interest rate only one rate in a particular segment yield curve—usually the short-term (overnight) segment.
A similar argument could also be offered in the cases of wDR considered in the next section: the wDR issuance (supply) could be restricted, rather than constraining redeemability from wDR back to reserves.
In principle, one could imagine a design of required reserve maintenance mechanism that banks could be allowed to use their wCBDC balances to fulfil domestic reserve requirements in parallel with conventional reserves. In this case the incentive will appear to keep wCBDC overnight (rather than intraday only) to fulfil the required reserves.
The main BOM instrument, the bill, temporarily ties up liquidity and prevents banks from using it for the period of holding.
Because the BOM does not remunerate required reserves in the new framework, it also follows from the condition in Pfister (2019) that the remuneration rate on both retail and wholesale CBDC should be set to zero. In particular, even if conventional required reserves are remunerated—as in some other central banks—this condition does not suggest that CBDC has to be remunerated.
