By Mohammed Kudrati
The Reserve Bank of India today announced that it was launching the pilot of the digital rupee for retail (e₹-R) starting December 1. This pilot will be launched within a closed section of users and will be usable in all forms like cash.
This pilot will specifically test the strength of the digital rupee's creation, distribution and retail usage in real time. This pilot would form the basis of future pilots.
As promised, the RBI is launching this pilot a month after it launched the pilot for the e₹-W - the wholesale version of the digital rupee, where the selected banks will use the digital rupee e₹-W to settle transactions in government securities in the secondary market.
Being more retail oriented, the e₹-R will have more consumer-focused options.
In its press release, the RBI has outlined the following characteristics of the e₹-R:
- It will be tokens representing the Indian rupee and will be considered legal tender
- They will be issued in the same denominations currently available in the form of physical cash
- The digital rupee can be stored on devices and wallets, and can be used to transfer money people-to-people or people-to-merchants (the latter using QR codes)
Like cash, it carries the backing of the state, will not earn any interest and can be converted normally into bank deposits.
Who will be testing this?
The pilot will initially consist of four banks: the State Bank of India, ICICI Bank, YES Bank and IDFC First Bank.
Later, it will be joined by Bank of Baroda, HDFC Bank, Kotak Mahindra Bank and the Union Bank of India.
Where will it be tested?
The initial four banks would cover four cities: Mumbai, New Delhi, Bengaluru and Bhubaneswar.
Later, the scope of the cities would expand to Gangtok, Ahmedabad, Guwahati, Indore, Hyderabad, Kochi, Lucknow, Shimla and Patna.
Read the RBI's press release here.
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What is the digital rupee?
The digital rupee is the RBI's version of a central bank digital currency (CBDC), which is a blockchain-based variant of their respective national currencies.
Blockchain also the technology behind cryptocurrencies like bitcoin, ethereum and dogecoin, but these entities are not backed centrally by any organisation, and their legitimacy varies by jurisdictions. In India, right after this year's Union Budget, Finance Minister Nirmala Sitharaman referred to these as "digital assets" or "private virtual assets: and not as "digital currencies" as they are not backed by any monetary authorities. She also announced the digital rupee would be tested this financial year, which is being rolled out.
Therefore, central banks all around the world are trying to leverage blockchain to build cryptocurrency or digital variants of their own currencies.
The white paper on the digital rupee was launched by the RBI on October 7 this year.
The digital rupee would enjoy the same features and recognition granted to other forms of money like bank deposits or cash:
- It cannot be refused to be accepted in transactions
- It is legal tender and officially aligns with the RBI's monetary policy
- Users need not have bank accounts to use them
- Freely convertible into cash or bank accounts
- Appears as a liability on the central bank's balance sheet, as the central bank must honour it for it to be valid for transaction
But, the reason that gives the digital rupee the edge over physical rupee is that it is cheaper and more economical to produce and maintain, whereas physical cash incurs a cost (₹4,984 crores in financial year 2021 - 2022).
The RBI has also identified digital rupee as a channel to catalyse financial inclusion initiatives in India.
Read the paper here.
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