Post the first pilot of the digital rupee in the wholesale segment, the RBI has announced the launch of the first pilot for retail digital rupee on December 1, 2022. The digital rupee would be in the form of a digital token that represents legal tender. While the successful implementation of the pilot is expected to revolutionize the way Indians transact, the Reserve Bank is not the first to introduce the use of digital currencies.
Central Bank Digital Currency
Backed by the central bank, a Central Bank Digital Currency (CBDC), is the digital form of a country’s fiat money. Central banks across the world are exploring the use of digital currencies, with 11 countries having already launched their own e-currencies and 87 countries under the process of implementation. 1
The Indian Scenario (e-rupee)
The Government of India announced the launch of the Digital Rupee in the Union Budget placed in the parliament on February 1, 2022. The purpose of a digital rupee, as stated in the budget, was to bolster the digitization of the financial ecosystem in the country.
In the last two years, the digital payment transactions in the country have grown at a CAGR of 22% in terms of value and 60% in terms of volume. While total digital payments dropped due to the precautionary holding of cash during the months following the second wave of the pandemic, a consistent rise was seen post the lifting of the second lockdown.
The chart below shows the value and volume of total digital payment transactions over the last two years.
Source : Payment and Settlement Indicators, RBI
This rapid rise in digital payments, which had picked up pace post demonetization, as well as the global developments in the field of CBDC had led the RBI to set up an Internal Working Group in Oct’20 to undertake a study on implementation framework for introduction of the digital rupee. The recommendations of the committee covered aspects like the design and segment-wise (wholesale and retail) implementation.
The key motivations for the introduction of the digital rupee included the following:
1. Reduction in cash management expenditure
Cash management in India involves significant expenditure to be incurred on security printing. Such expenditure increased from Rs. 4,012 crore (July’20 to Mar’21) to Rs. 4,984 crore (Apr’21 to Mar’22). This expenditure is borne by the general public, businesses, banks and the Central Bank. The introduction of a digitized currency reduces such operational costs, i.e costs related to printing, storage, transportation and replacement of banknotes. Although in its initial stages, creating a CBDC would entail significant fixed infrastructure costs like technology expenditure, the subsequent marginal operating costs shall be very low. Moreover, given the limitations of making physical cash available to a widely dispersed population, CBDC is expected to be a seamless and efficient mode of transaction.
2. Supporting competition among existing payment systems
The financial system in India and the world over is experiencing a digital revolution, with payments-based companies leading the way. Of the total number of fintech companies registered in India, the share of payment-based fintech companies, stood at 48.5% as of Aug’21. 2 The Digital Payment Index by the RBI further demonstrates significant growth in the adoption of digital payments systems since its inception in 2018. The introduction of CBDC is expected to augment the already existing payment systems. Moreover, besides expanding the choices available to the larger public, the sovereign guarantee ensures safety of transactions.
Source : RBI, Base year taken as 2018
3. Financial Inclusion
The annual Financial Inclusion index for India, released by the RBI, stood at 56.4 for Mar’22, as compared to 53.9 for Mar’21. The marginal improvement in financial inclusion suggests that a significant proportion of the population still remains unbanked and underbanked. The offline feature of the digital rupee ensures that the transaction takes place despite internet unavailability and poor internet connectivity.
Way Forward
Since the concept of a digitized currency is still at a nascent stage worldwide, the Reserve Bank is currently following a step-by-step approach in its implementation. In the first pilot in the digital rupee – wholesale segment, nine banks participated. These included the State Bank of India, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC. The use of the wholesale digital rupee is expected to make the inter-bank market more efficient. The first pilot for retail transactions will begin with four banks (State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank) in four cities (Mumbai, Delhi, Bangalore, and Bhubaneshwar) and later extend to tier-2 cities. A successful implementation would involve monitoring developments and pilots across the world, as well as extensive stakeholder consultation.
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