RBI Launches Digital Rupee for Retail- Here is All You Need to Know

On December 1, 2022, the Reserve Bank of India (RBI) launched the first pilot project for the retail Digital Rupee. The much-awaited central bank digital currency (CBDC), which also goes by the name of e-Rupee, is an electronic version of the fiat currency. It would offer the same features as physical cash, like trust, safety and settlement finality.

The central bank has stated that the pilot will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time. Different features and applications of the e₹- R token and architecture will be tested in future pilots, based on the learnings from this pilot.

What is the Retail e-Rupee?

Retail e-Rupee is an electronic form of sovereign money that has been launched to serve the retail sector and facilitate retail transactions. It is similar to a cryptocurrency but enjoys the backing of the Reserve Bank of India. As per the RBI, the retail Digital Rupee will provide access to safe money for payment and settlement as it will be the direct liability of the central bank. It will be available for use by the private sector, businesses, and non-financial customers.

In an announcement made on November 29, 2022, the RBI stated that the e-Rupee would be in the form of a digital token that will represent legal tender. Also, the e-Rupee will be issued in the same denominations that paper currency and coins are currently being issued. The RBI had earlier mentioned that “a token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash”. A token-based CBDC is a bearer instrument which means that just like banknotes, it is presumed to be owned by whosoever holds it at a given point of time.

How will e-Rupee reach the users?

The e-Rupee will be issued by the RBI and distributed through intermediaries, i.e., banks, similar to how physical currency is issued and managed at present. The users will be offered a digital wallet by the participating banks, through which they can transact with e-Rupee. These wallets can be stored on mobile phones and other devices.

The users will be able to make transactions of both types- Person to Person (P2P) and Person to Merchant (P2M). Person to Merchant payments will be made using QR codes displayed at merchant stores. Also, it is to be noted that, as in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks.

Who all are participating in the project?

Initially, the project will go live in four cities across the country- Mumbai, New Delhi, Bengaluru and Bhubaneswar. Additionally, eight banks have been identified for phase-wise participation in this pilot project. The first phase will include State Bank of India, ICICI Bank, YES Bank and IDFC Bank as the project’s participants. The project will be subsequently joined by four more banks, namely, Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank. The pilot would later be extended to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla.

Customers and merchants in the closed user groups in the mentioned cities will be able to use the e-Rupee and reap the benefits out of it.

Potential benefits of e-Rupee

The e-Rupee is backed by the Government of India, which grants it multiple advantages over other payment methods. This support will lead to safer and risk-free online payments and boost the digital economy. A solid digital payment system will also encourage people to use the e-Rupee, especially those who have been shying away from digital payments due to the associated fraud and risks. Furthermore, it will promote financial inclusion as no bank account is required to initiate transactions in e-Rupee.

Blockchain is the core technology behind the e-Rupee, making it uniquely identifiable and traceable. These features will help the government to better implement welfare schemes and prevent counterfeiting of currency and corruption. Additionally, the e-Rupee will also help in significantly bring down the costs associated with printing, handling and logistics management of physical cash. The system will also improve cross-border payments as the e-Rupee will not be bound to any geographical location.