Central Bank Digital Currencies - the Digital Euro and the Digital Dollar

In July 2022, the European Central Bank published a blog on the "key objectives of the digital euro". The blog co-authored by none other than Christine Lagarde, President of the ECB argued that a digital payment ecosystem such as the digital Euro without a strong monetary anchor would create confusion leading to financial instability as "it is crucial that we all still have easy access to central bank money, which is the foundation of our currency". In January 2022, the Federal Reserve came out with a highly anticipated paper on a digital dollar, taking a step in a process that could lead to Congressional action. This was followed in March 2022 by an Executive Order from the Biden administration placing the “highest urgency” on exploring a US CBDC and asks for an interagency report on all aspects of the future of money in the next 180 days. The Executive Order also advances US participation in cross-border experimentation of wholesale CBDCs. The ECB is analyzing how financial intermediaries could provide front-end services that build on a digital euro. The analysis expected to completed by October 2023 followed by the development of integrated services as well as carry out testing and possible live experimentation of a digital euro in a phase that could take around three years. Extrapolating this timeline guidance from the ECB, it would be safe to assume that a digital Euro will not be available before 2028 at the very earliest. The ECB is likely to drive large scale adoption of the digital euro once adopted and likely to increase the proposed amount of digital euros in circulation to 1.5 trillion euros to control the negative effects on financial stability.

The Fed also sees commercial banks and nonbank financial companies acting as intermediaries. Banks would issue and manage the digital wallets that people would use for payments and deposits. The US is the furthest behind when it comes to developing CBDCs among the G7 economies, according to the Atlantic Council.

Central bank digital currencies like the digital dollar and the digital euro are expected to be used for payment settlement. CBDCs pose tough competition to cryptocurrencies used for cross-border payment settlements such as Ripple (XRP) and to a limited extent Bitcoin (BTC). The underlying technology for both the digital dollar and the digital euro is based on concepts in cryptography and distributed or decentralized solutions such as DLT.

Inflation is the growth killer - and the RBI stifles it further through monetary policy

Last month, the Governor of the RBI, delivered a lecture at the London School of Economics on India's macroeconomic challenges in which he more or less admitted that RBI's monetary policy was largely to blame for declining growth in India. A large portion of the lecture focused on the huge inflation problem in India which as measured by the wholesale price index(WPI) was 9.6% in 2010/11, 8.9% in 2011/12 and 7.5% 2012/13. According to the RBI the major driver from the supply side has been food inflation, arising from rising incomes, especially in rural areas, which is leading to a shift in dietary habits from cereals to protein foods, the monsoon related spike in prices of food items such as vegetables and global commodity prices, especially the price of crude oil. The price of crude especially affects Indian inflation very badly since India imports 80% of its oil demand.



This commodity inflation is further compounded by the depreciation of the rupee and lack of demand adjustment due to the Indian governments subsidized pricing regime of petroleum products. But the worst growth killer of all has been RBI's response in the form of monetary policy as the Governor himself admits in his speech.

Will the obsession with Gold end in losses?

Ian Lyall, a former City News Editor at the Daily Mail has asked if Gold has finally lost its lustre? The article ends by citing a number of analysts who believe that Gold is bound to bounce back. Indians are one of the top buyers of the precious metal and the Indian obsession with the precious metal as a holder of value is legendary. Many investors jumped on the gold bandwagon when it hit the US$1900s in fall of 2011 and now  are regretting the purchase now that the metal has dropped to the US$1500s.



I believe that global economic uncertainty and quantitative easing programs of Central Banks are bound to heat up the demand for Gold in the short to medium term. My take on this correction is: if you have Gold in your portfolio keep it, if you do not have Gold, the current dip offers a buying window to give your portfolio exposure to the precious metal.