Explained: Why RBI is launching e-rupee in India

Four banks including SBI and ICICI will participate in the launch of the Central Bank Digital Rupee (CBDC) which will initially cover four cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar. While some experts remain cautious about the concept, others are downright enthusiastic

E-rupee to launch on 1 Dec: RBI’s rationale behind currency and what experts think

Four banks including SBI and ICICI will participate in the launch of the Central Bank Digital Rupee (CBDC) which will initially cover four cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar. While some experts remain cautious about the concept, others are downright enthusiastic

The Reserve Bank of India has announced it will launch its e-rupee for retail customers on 1 December.

Four banks including SBI and ICICI will participate in the launch of the Central Bank Digital Rupee (CBDC) which will initially cover four cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar.

Announcing the operationalisation of Central Bank Digital Currency – Retail (e₹-R) Pilot, the RBI said the pilot would cover select locations in closed user group (CUG) comprising participating customers and merchants.

“The e₹-R would be in the form of a digital token that represents legal tender. It would be issued in the same denominations that paper currency and coins are currently issued,” it said.

It would be distributed through banks and users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones/devices.

Transactions can be both Person to Person (P2P) and Person to Merchant (P2M).

The RBI further said the e₹-R would offer features of physical cash like trust, safety and settlement finality.

“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,” the central bank said.

The Central government had announced the launch of the digital rupee in the Union Budget.

But what is the RBI’s rationale behind the e-rupee? And what do experts think?

Let’s take a closer look:

But first, let’s briefly examine the e-rupee.

According to the RBI website, CBDC is “the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different,”

In essence, it is basically the digital version of the rupee.

This is completely different from Bitcoin, which does not enjoy the status of ‘legal tender’ and is not backed by the state or any central bank.

RBI spells out rationale

The RBI in a concept note on 7 October, 2022, stated that CBDCs have some clear advantages over other digital payments.

“As it being a sovereign currency, ensures settlement finality and thus reduces settlement risk in the financial system. CBDCs could also potentially enable a more real-time, cost-effective seamless integration of cross border payment systems,” the RBI stated.

It added that India has made impressive progress in innovation in digital payments.

It noted that the systems are available around the clock, 365 days a year to both wholesale and retail customers, largely work in real time, and that the cost of transaction is perhaps the lowest in the world.

The RBI said the e₹-R would bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient.

It also listed the following motivations:

• Reduce the cost associated with physical cash management
• To further the cause of digitisation to achieve a less cash economy
• Support competition, efficiency and innovation in payments
• To explore the use of CBDC for improvement in cross-border transactions
• Support financial inclusion
• Safeguard the trust of the common man in the national currency vis-à-vis proliferation of crypto assets

What are other countries doing?

According to the Atlantic Council, Jamaica, The Bahamas, Antigua and Barbuda, St Kitts and Nevis, Monserrat, Dominica, Saint Lucia, St Vincent and the Grenadines, Grenada and Nigeria have all rolled out CBDCs.

According to Deccan Herald, 17 countries including South Korea and China are in the pilot stage.

Beijing, the first large economy to pilot a CBDC in April 2020, is aiming to have its digital yuan (e-CNY) widely used by 2023.

Meanwhile, RBI in a report last month said 105 countries were exploring CBDCs.

What do experts think?

Some argue for caution and say time will tell.

A piece in the Financial Express contended that though other nations who have launched CBDCs suited to their economies, the case for one in India ‘remains unclear’ given the prevailing circumstances.

“…the Bahamas and the Caribbean have floated the CBDCs to counter cash disbursement issues owing to their tough geographical terrain. The Swedish Central Bank is exploring the rollout of a digital currency to address the dwindling usage of cash in its economy. India, on the other hand, does not seem to have a pressing need for an immediate CBDC rollout,” the piece argued.

The piece also posited one reason for India launching its CBDC was to keep up with other countries.

“Without a CBDC system in place, India cannot partake in such international payment corridors that enable seamless international trade settlements. This may, in fact, be one of the reasons why the central bank, with great fervour, displayed alacrity in floating the digital rupee,” the piece added.

The piece concluded that “jumping the gun and bowing to international pressure (read G20) might expose the crevices in the hasty implementation of the digital rupee to vulnerabilities.”

Others are far more optimistic.

In the aftermath of the RBI launching its first pilot in the digital rupee wholesale segment on 1 November,  Sanjeev Chandak, the co-founder and CEO of financial services firm Ftcash, told Deccan Herald, “CBDC will further be a positive step towards the adoption of blockchain for financial services, and will align India with the world that is rapidly progressing towards adoption of digital currencies.”

Bank of Baroda Managing Director and Chief Executive Officer Sanjiv Chadha told Deccan Herald, “Though it is currently in its pilot stage only, still one thing is clear – that technical capability has been established, as the first deal was done between BoB and SBI under the project.”

Ankit Wadhwa, the co-founder and CEO of cricket-related non-fungible token platform Rario, told the newspaper, “Digital rupee has simplified the banking ecosystem. For starters, it is a verifiable money transfer.”

Meanwhile, Rachit Chawla, CEO & Founder, Finway FSC, talking to CNBC-TV 18, said the move was aimed at giving a fillip to the digital economy.

Chawla noted that the concept of initiating digital currency is only to complement the existing forms of financial transaction and not replace them.

Mahesh Shukla, CEO & Founder at PayMe, added, “This payment system will be affordable, accessible, convenient, efficient, safe, and secure; making them a better and trusted option for financing in the future.”

Jaya Vaidhyanathan, CEO at BCT Digital, said the rollout of the CBDC has been one of the most sought-after developments since its announcement in the FY23 Union Budget.

“RBI’s commencement of the pilot of the digital rupee marks appreciable progress in the journey toward digital payments. While experts were wondering when India – the world’s fifth largest economy – would start in this regard, RBI as usual has not disappointed. A successful pilot and by extension, a full rollout of the digital rupee is expected to boost the reach of payment and financial needs of a wider category of users while ensuring transparency and low operational cost,” she said.

Speaking in the Lok Sabha last year, Minister of State for Finance Pankaj Chaudhary said: “Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. Introduction of CBDC would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.”

With inputs from agencies

This article originally appeared on https://www.firstpost.com/ and was reproduced here with permission