Digital Rupee: Exploring the Future of India’s Central Bank Digital Currency (CBDC)

As the world pursues excellence through digital innovation, central banks worldwide are following the trend. One such digital innovation is the Central Bank Digital Currency (CBDC). India has also followed in the footsteps of other developed countries and, in December 2022, launched the ‘Digital Rupee’. Over the past several years, digital transactions have been dominating the way people transact. This trend has been the primary driver of the introduction of the Digital Rupee. The launch of this digital currency is a significant step taken by the Reserve Bank of India (RBI) as it completely transforms how money is perceived, used for transactions and managed. Even though digital currency presents certain challenges, the introduction of Digital Rupee presents multiple opportunities that signify India’s move towards becoming a digitally evolving nation.

What is Digital Rupee?

The Digital Rupee, also known as the e-Rupee (e₹), is a digital form of Indian currency issued by the RBI. It is often mistaken for being a form of cryptocurrency. However, unlike cryptocurrency, which is decentralised and operates without a central governing body, the Digital Rupee is a sovereign currency backed by the RBI. The key aim of introducing this digital currency is to complement the existing physical currency and offer an alternative to people that is secure, efficient and convenient to conduct transactions.

The Digital Rupee pilot programme was launched in December 2022. It is part of the broad initiative by the Indian government and the RBI to modernise the financial system and enhance financial inclusion while promoting the use of digital currency over physical cash. While the e-Rupee is a legal tender issued by the RBI, it is different from the way an individual holds deposits in bank accounts. It does not attract interest that is usually gained from traditional deposits. However, one’s deposits held in the bank can be converted into digital rupees and vice versa.

Need for Digital Rupee

• Rise of digital transactions

There has been a great increase in the volume of transactions conducted via digital channels, compared with traditional forms of transacting via physical bank notes, since the introduction of the Unified Payments Interface (UPI). The RBI governor in March 2024 announced that retail digital payments rose from 162 crore transactions in FY13 to over 14,726 crore transactions in FY24 (as of February 2024). He added that India now leads at the global level as it now accounts for ~46% of the world’s digital transactions.

Source: PIB, *As of February 2024

The massive popularity of UPI is a testament to India’s shift towards digitalisation and a base for growth in the usage of the Digital Rupee. The mass appeal of UPI has also enabled dominating foreign players in the UPI space – such as Google Pay, Walmart-backed PhonePe and Amazon Pay – to enter the digital currency space. These companies hold more than 85% market share of India’s digital payments made that are done through UPI. Additionally, to integrate Digital Rupee as part of their platforms they have collaborated with the RBI and National Payments Corporation of India (NPCI). This helps the companies to expand their user base and adaptability of the Digital Rupee.

• Financial inclusion 

India is a developing nation with majority of the population residing in rural areas. It has been battling with the challenge of financial inclusion. This leads to much of the population having no bank accounts as they lack financial literacy as well as infrastructure. The lack of infrastructure, poor connectivity and socioeconomic barriers are the major contributors to the low financial inclusion of rural people. As per RBI reports, India’s financial inclusion index is 56.4% as of March 2022. The Digital Rupee can be introduced in rural areas to bridge this gap as digital currency does not require fully functional bank accounts and it works offline, thereby boosting inclusion. The widespread usage of smartphones and growing internet penetration are major enablers of the adoption of digital currency.

• Promotion of a cashless economy

Printing, distributing and securing cash involves a substantial cost for the government as well as financial institutions. The expenditure for printing currency notes between April 2021 and March 2022 was Rs. 4,984 crore (US$ 596.67 million), as per RBI reports. COVID-19 offered a prime example of cash mismanagement as cash was held as a precaution for the ongoing challenges during that period. With the introduction of Digital Rupee, the costs involved reduce significantly and the need for holding physical cash diminishes. Additionally, it plays a big role in reducing the environmental issues that are caused in the process of printing and transporting cash.

• Enhanced transparency and reducing fraud

Since CBDC is based on blockchain and similar technology, it enhances the transparency of financial transactions. The scope for fraud and money laundering is reduced as each transaction can be tracked and recorded. 

• Implementation of monetary policy

The current global economic crisis has a negative impact on the Indian financial system as well. During such periods, usually the RBI intervenes and manages the monetary policy. RBI makes sure that the steps taken help the financial condition of the country. Digital Rupee can help in such a situation as the RBI can issue or withdraw digital currency, and ultimately control money supply.

Impact of Digital Rupee

The introduction of digital currency is expected to have great positive impact on the Indian economy. It is expected to make payments faster, efficient and secure. Below are some of the impacts of Digital Rupee in India, on businesses and individuals.

• Impact on India
  Digital Rupee is expected to benefit the Indian economy significantly and boost economic growth by enabling various factors such as:
  • Increased financial inclusion
  • Reduced cost of financial transactions
  • Increased investments
  • Increased economic growth
     
• Impact on Indian businesses
  Digital Rupee is expected to make it easier for businesses to make payments and receive payments from customers and the other stakeholders conducting business in India. It is also expected to benefit businesses by reaching new customers and expanding their markets.
  • Cost efficient:  Digital Rupee is expected to reduce the cost of payments for businesses. This is because digital rupee transactions are managed between wallets without the need for intermediaries.
  • Operation efficiency: Because digital rupee transactions are processed in real time, 24/7, Digital Rupee is expected to make payments more efficient for businesses. 
  • Expanded markets:  As Digital Rupee payments can be accepted from anywhere in the world, it is expected to help businesses expand their markets and reach more customers.
     
• Impact on individuals
  Digital Rupee is expected to have a positive impact on individuals. It is likely to enhance individuals’ convenience to make payments, save money and invest. It is also expected to help individuals protect their money from fraud and theft. Below are some specific ways it is expected to impact individuals:
  • Convenient payments
  • Reduced risk of fraud and theft
  • Increased financial inclusion
  • Enhanced privacy

Conclusion

With the potential to change the way we make payments and manage our finances; the Digital Rupee is a new and modern form of currency. It is expected to have short- and long-term impact on the Indian economy and society. The Digital Rupee is still in the development stage. The Digital Rupee offers major scope in the areas of:

• Cross-border payments
• Innovation in fintech space
• Integration with Blockchain technology

The Digital Rupee is not just another form of currency, but a proof of innovation in India’s financial sector. India has an opportunity lead in the digital currency space by adopting this new form of currency.