Reserve Bank of India rolls out digital Rupee



The Reserve Bank of India rolled out its digital currency — the Central Bank Digital Currency (CBDC) on November 1. The CBDC, a legal tender issued in digital form, is the same as a fiat currency but the form is different and is exchangeable one-to-one with government-issued money.

Central Bank Digital Currency (CBDC) is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country’s unique requirements. CBDC is a legal currency in a digital form.

The RBI is launching CBDC in two phases. The first pilot launch in the digital Rupee – Wholesale segment (e₹-W) commenced on November 1, 2022. “The first pilot in Digital Rupee – Retail segment (e₹-R) is scheduled to be launched within a month in select locations in closed user groups comprising customers and merchants,” the RBI informed.

“Recent innovations in technology-based payment solutions have led central banks around the globe to explore the potential benefits and risks of issuing a CBDC so as to maintain the continuum with the current trend in innovations,” the RBI has stated in its concept note for CBDC.

RBI has also been exploring the pros and cons of the introduction of CBDCs for some time and is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch, and simultaneously examining use cases for the issuance of its own CBDC (Digital Rupee (e₹)), with minimal or no disruption to the financial system. “Currently, we are at the forefront of a watershed movement in the evolution of currency that will decisively change the very nature of money and its functions,” RBI’s concept note states.

CBDC, being a sovereign currency, holds unique advantages of central bank money viz. trust, safety, liquidity, settlement finality, and integrity. “The key motivations for exploring the issuance of CBDC in India among others include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency, and innovation in the payments system, adding efficiency to the settlement system, boosting innovation in cross-border payments space and providing public with uses that any private virtual currencies can provide, without the associated risks. The use of the offline feature in CBDC would also be beneficial in remote locations and offer availability and resilience benefits when electrical power or a mobile network is not available,” the RBI has informed.

On October 7, 2022, RBI had announced the pilot launch of the Digital Rupee (e₹) for specific use cases.

This digital Rupee will be used for the settlement of secondary market transactions in government securities. The use of e₹-W is expected to make the interbank market more efficient. Settlement in central bank money would reduce transaction costs by preempting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.

“Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot (launch),” the RBI said in a press release.

Nine banks, viz., State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC have been identified for participation in the pilot project.

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