Central bank digital currency and Banking sector volatility: an empirical examination using the EGARCH framework

This paper examines the impact of central bank digital currency (CBDC) on the conditional volatility of the Indian banking sector for the period April 2020 to December 2024. We employed an exponential GARCH model augmented with exogenous variables. For CBDC, we consider the CBDC uncertainty index and the CBDC attention index as proxies for news and media reaction to the concept of CBDC, and the Bank Nifty metric for the Indian banking sector. Our empirical result shows that there is a negative relation between CBDC indices and Bank Nifty, reflecting that CBDC discussion reduces and stabilises the volatility of Bank Nifty. Further, the magnitude of the attention indices is more pronounced than the uncertainty index. These findings contribute to the emerging body of knowledge on the financial market implications of CBDC adoption and carry practical insights for portfolio risk management, bank supervisory frameworks, and the design of CBDC communication strategies by central banks in emerging market economies.