CBDC India: How Far are We?

Key takeaways

• India's foray into CBDC, termed the Digital Rupee, began with legislative amendments in March 2022, followed by pilot launches in November and December 2022 for wholesale and retail segments. The pilots have expanded to 15 cities, 50,000+ customers, and 10,000+ merchants, marking a significant step in digital currency adoption.
• The RBI distinguishes between wholesale (e₹-W) for financial institutions and retail (e₹-R) CBDCs for the general public and businesses. The retail version, accessible via digital wallets from participating banks, supports P2P and P2M transactions, emphasizing versatility in use cases.
• The Digital Rupee's user base grew to 4 million by January 2024 after banks began disbursing employee benefits through it, reaching 1 million daily transactions by the end of 2023. Such growth underscores the Digital Rupee's potential in mainstream finance.
• The CBDC in India aims at enhancing financial inclusion, reducing costs related to cash management, and innovating payment systems. With the RBI exploring asset tokenization and cross-border payment efficiency, the CBDC's integration into India's digital economy signals transformative possibilities.

India is one of the over 130 nations around the world currently exploring a CBDC or a Central Bank Digital Currency. The Government of India announced the launch of the Digital Rupee in Budget 2022. The RBI defines the CBDC India as the legal tender issued by the central bank in the form of a digital currency. Further, it is exchangeable on par with the current fiat currency and is accepted as a medium of payment, legal tender, and a store of value.

Note that the National Payments Corporation of India (NPCI), which developed the Unified Payments Interface (UPI) in 2016 and initiated the era of cashless payments, is also behind the CBDC India.

Planning and launch of CBDC India

• The planning for India's CBDC began with the RBI forming a high-level committee in February 2022. This committee was responsible for conducting an extensive study on various aspects of CBDC and suggesting measures for its successful introduction. 
• The Government of India, through a gazette notification dated March 30, 2022, amended the Reserve Bank of India Act, 1934, to enable the pilot and subsequent issuance of CBDC​​.

Here’s how the Indian government defines the features of CBDC India:

Pilot projects

• India launched two CBDC pilots in 2022. The first was a wholesale CBDC (CBDC-W), which began on November 1, 2022, with nine banks participating. 
• The second was a retail CBDC (CBDC-R) pilot, which started on December 1, 2022, initially in four cities - Mumbai, New Delhi, Bengaluru, and Bhubaneswar, involving four major banks. This pilot has since been extended to 15 cities, with 50,000+ customers and 10,000+ merchants onboarded, including Reliance Retail, India's largest retail chain​​​​.

Types of CBDC India 

The RBI has defined two types of CBDCs:

• Wholesale CBDC (e₹-W): Targeted at financial institutions, it is designed to improve the efficiency of interbank payments.
• Retail CBDC (e₹-R): Aimed at the private sector and Indian citizens, it is a digital token representing legal tender, issued in the same denominations as paper currency and coins. It can be transacted through a digital wallet offered by participating banks and supports both Person to Person (P2P) and Person to Merchant (P2M) transactions​​.

Current developments in CBDC India

As of now, the retail CBDC project is making significant headway, with the RBI gradually expanding the scope of the pilots to include more banks, users, and locations based on feedback received during the pilots​​. The banks selected in the phase-wise pilot programme for CBDC India have been the:

• First phase: State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank and 
• Second phase: The Union Bank of India, HDFC Bank, Bank of Baroda, and Kotak Mahindra Bank

All the banks have been launching their Digital Rupee app to allow users to test out the new form of currency. Further, it is now linked to NPCI’s UPI too.

Reportedly, transactions in the e-rupee averaged to just about 25,000 per day by the end of October 2023, until some of the Indian banks decided to disburse employee benefits through the Digital Rupee in December, helping the RBI reach 1 million daily transactions in CBDC by the end of 2023. These banks included the HDFC Bank, Axis Bank, Kotak Mahindra Bank, Canara Bank, and IDFC First Bank.

The Digital Rupee has seen a growing user base too; from 3 million users in December 2023, it was up to about 4 million users in January. As more exciting and unique use cases come forward, this number is expected to go up. 

Speaking of which, the RBI is now considering tokenising assets like government bonds and customer deposits to take e-rupee usage to new heights. Such tokenised securities would be ideally purchased with CBDC India, making the settlement instant. 

Further, it has been estimated that the e-rupee can cut the cost of cross-border payments in half to about 2-3%. This is another use case of CBDC India being considered, expected to boost adoption. 

What are the implications for such a digital currency in India?

Advantages of digital currency or CBDC include anonymity for small-value transactions and traceability for high-value transactions. There are some concerns about privacy and cybersecurity, and the RBI is expected to adopt appropriate safeguards.

One thing is certain: India's journey towards implementing a CBDC is a significant step in its digital finance landscape, with efforts focused on ensuring that the digital currency aligns with the modern digital economy's needs. 

How will CBDC boost financial inclusion in India?

CBDC has the potential to significantly boost financial inclusion in India through various mechanisms. 

• It provides a digital form of currency that does not require a fully functional bank account and can potentially operate offline. By lowering the entry barrier for accessing financial services, India’s CBDC addresses the issues of lack of infrastructure, poor connectivity, and socioeconomic barriers that contribute to lower financial inclusion in India, where the RBI’s Financial Inclusion Index scored 60.1% in 2023​​.
• CBDC cuts costs related to physical cash management, which is significant in a country like India where billions are spent annually on printing money. By reducing these expenses, CBDC can make financial services more accessible and efficient. 
• CBDC can also lead to innovations in payment systems, providing diverse and secure transaction options to consumers. It can offer enhanced security for online transactions, reducing the risk of fraud and misuse.
• Additionally, by enabling reliable identification procedures linked to unique digital identities, CBDC can establish trust in the digital payment system and reduce risks associated with fraud and terrorist financing​​.
• Another crucial aspect of CBDCs is their potential to facilitate direct distribution of funds from Central Banks to citizens. This can be particularly transformative in improving access to government and financial services, thereby advancing financial access, participation, equity, and overall well-being. 

The success of mobile money accounts in expanding financial inclusion in regions like Sub-Saharan Africa highlights the potential for CBDCs to play a similar role, especially in countries where a significant portion of the population remains unbanked but has access to mobile phones​​.

How to access RBI digital rupee?

If you have not used the CBDC India yet, you can access it through any of the 13 banks participating in the e-rupee program, spread across 26 cities. Some of these banks are: the State Bank of India, ICICI Bank, Yes Bank, IDFC First Bank, The Union Bank of India, HDFC Bank, Bank of Baroda, Axis Bank, Canara Bank, and Kotak Mahindra Bank. 

All of these banks have launched their digital rupee apps to allow easy transactions. You can follow a few simple steps to access them:

• Go to your bank’s website and look for the digital rupee option.
• Once you have expressed your desire to join the pilot, the bank will let you know through email and SMS after you are selected as part of the CUG or Closed User Group for the program.
• Complete the registration on the bank’s respective e-rupee (e₹-R) wallet and fund it. You can do this through a bank transfer from your linked account, or now that the e-rupee is linked with UPI, you can avail of the service to fund your CBDC India wallet.
• Your wallet will exchange your fiat money for e-rupee, and you are free to initiate transactions now.

Note that with e-rupee, you can scan even UPI QR (quick-response) codes at different merchant outlets and pay for everything from regular small transactions to bigger ones. This is possible as e-rupee is now compatible with UPI. 

The takeaway 

The Digital Rupee is yet to achieve the mainstream status in India that UPI (and our paper money) enjoys, even as an increasing number of banks make it available to their users from prominent Indian regions. The reason would be that it hasn’t proposed a unique use case yet that is not already served by digital payment systems like the UPI. However, as the government explores the viability of tokenisation of securities to expand the usage of the CBDC India, the coming times are bound to be exciting for India’s digital economy.